Imagine that your friend, a heavy smoker, tells you, “I’m finally going to live a healthy lifestyle. I’m cutting down to one pack a day instead of two.”
You would probably look at your friend as if he or she had two heads. It’s the same idea with the state of sustainable investing today.
“I now have a ‘sustainable portfolio’ because I only invest four percent of my portfolio in fossil fuel companies as opposed to the six percent benchmark.” Or even better, “I now only invest in sustainable oil companies.”
How do you define “sustainable”? My first thoughts are organic and whole foods. I think of solar panels, wind turbines, electric cars, unicorns, and rainbows.
I picture a beautiful beach with palm trees as the sun slowly disappears into the water. I don’t think of fossil fuel companies. “Sustainable oil” is an oxymoron.
Fossil fuel companies, by definition, can never be sustainable. They are extracting a resource that is finite, poisons the air we breathe, and destroys the Earth right before our eyes.
Over the past few years, sustainable, socially responsible, and impact investing have increasingly gained traction.
In a recent survey, ninety-three percent of millennials said they wanted to invest their money sustainably, and the financial services industry has responded in kind.
The industry’s largest roboadvisor, Betterment, just came out with a supposedly sustainable option.
So, let’s take a look under the hood. The strategy invests in the iShares DSI, which is supposed to track socially responsible companies. It “only” invests five percent in fossil fuel companies, while the benchmark is six percent. Betterment’s international stock exposure has no mandate to be sustainable.
Buyers beware: you may not be getting what is advertised. There is simply no industry standard for what it means to be sustainable or socially responsible.
After researching this over the past few years, I’ve found that every sustainable fund always comes with a major compromise. There are ETFs that are fossil-free but still invest in factory farms, tobacco, or firearms.
Mutual funds are better, but then you face all the baggage that comes with owning mutual funds. More often than not, they underperform, and you end up paying an arm and a leg in hidden fees and expenses.
So, does that mean you should just scrap the whole sustainable investing thing? If you are investing for the long term, I do believe that sustainable investing should be at the heart of your portfolio.
Think about it. Sustainable, by definition, means to remain diverse and productive indefinitely. Why would anyone investing for retirement or the long term invest any other way?
It would be silly to prefer investments that will probably go bankrupt or slowly diminish in value over the next ten or twenty years.
Quick disclaimer: I’m not an aspiring social justice warrior on my high horse. In fact, I’m dedicating my working life and business to sustainable investing because I truly believe in the power that voting with your wallet can have on the world, your well-being, and your net worth.
We all know how important it is to cast a ballot at the polls. Even if you think the gesture is just symbolic, it still makes you feel good about exercising your right as a citizen.
It’s the same with responsible capitalism: if everyone divested from the fossil fuel industry, it would dramatically hasten the switch to sustainable alternatives. Every dollar invested in fossil fuel companies increases their lifeblood in the form of liquidity and access to capital.
So, who gets to define what is or isn’t sustainable? Everyone has a different opinion, but I think most people would agree on the central themes.
For starters, there should be no investments in fossil fuel companies. My company, Impact Fiduciary, also avoids investing in tobacco, gun manufacturers, pharma companies selling opioids as well as factory farms.
The commonality these companies share is a large negative impact on the public and a growing movement against their businesses. Over the long run wouldn’t it be better to focus on profitable companies that are neutral or have a positive social impact?
For instance in late July, Altria, the biggest tobacco company, dropped 20% in one day because of a potential new law that could regulate the amount of nicotine in their products. It’s not wise to buy companies that legions of people are against especially when they have valid reasons.
No one likes a negative Nancy. It’s not enough to just be against something. The energy it takes to be against something isn’t necessarily healthy or productive in the long run.
It’s more important to focus on creating positive change and trying to solve difficult problems. For example, you can transition your money from fossil fuel companies to green utilities, unleashing the power of hydro, wind and solar energy.
Or take the money invested in tobacco and buy more of the pharmaceutical company with ambitious plans to cure cancer. Your money really can make a difference.
What if you are a DIYer? How do you build a diversified portfolio of stocks and ETFs that is still sustainable?
Before investing in an ETF, you can look at the underlying holdings and sectors. Morningstar offers some great free tools online. You can also look at Yahoo Finance or just go directly to the ETF company’s website.
CSR Hub is an excellent resource for finding sustainable enterprises. It rates companies on their community engagement, their environmental impact, how they treat employees, and their corporate governance.
The site’s algorithm generates easy-to-follow scores and peer rankings, kind of like a Travelocity for sustainable ratings.
While CSR is a valuable resource, using it to conduct more in-depth research may be expensive for an individual investor. A basic Google search will also help you screen out any companies that have had any recent controversies.
The reality is that if you are like most people, you probably don’t have the time or inclination to do this on your own. The easier route is to work with a professional.
Partner with a proactive financial advisor who offers this as a core focus. This will increase your chances of optimizing your results while aligning your portfolio to your specific goals and risk tolerance.
As a bonus, you will support a business dedicated to accelerating the sustainability movement. Interested in transitioning to a truly sustainable portfolio?
I encourage you to schedule an appointment to learn more.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Patrick Dinan, and all rights are reserved.