Socially Responsible Investing – is it all smoke and mirrors?

Let’s start with a good ole fashioned game of “Would you Rather?” Don’t worry, we won’t ask you anything too heinous. Instead, the question is simple: “Would you rather make $1 million by investing in oil and gas…or make $500,000 by investing in renewable energy?” If you don’t automatically choose the first option, you’re likely a Millennial or a member of the most socially conscious generation on the planet - Gen Z. And if you care about how your choices affect that beautiful green planet, it’s time to talk about socially responsible investing.

What is Socially Responsible Investing?

You’re a smart cookie so the answer to this question should be fairly obvious. But don’t skip forward to the next section just yet; we’ve got the knowledge to drop. Socially Responsible Investing is a subjective criterion used by an investor to rate the social responsibility of an organization. Other than SRI, you may also have heard the term “ESG”. ESG stands for Environmental, Social, Governance and is a supposedly “objective” measure of an organization's environmental, social, and governance behaviors. By placing a premium on positive impact, socially responsible investors look for companies that have the greatest returns not just for shareholders, but also for stakeholders. What’s the difference? Shareholders own stock in a company and are financially impacted by the decisions that the company makes. Stakeholders are impacted too…but not financially. They have an interest in the decisions that the company makes, not because it has an effect on their bank account, but because it has an effect on their way of life. For example, a very profitable company may have performed strongly in the market this past year, and as a result, had very positive effects on its investors. Yet, their supply chain may have negatively impacted the lives of individuals across the globe. That dichotomy can be a tough pill (with unfortunate side effects) to swallow for socially responsible investors.

SRI is different for everyone

There are two primary ways to think about socially conscious investing, but neither is perfect. The first seeks out companies that prioritize social impact - such as the advancement of women, people of color, and other marginalized groups - or environmental change. The other avoid companies whose businesses run counter to ethical principles. Of course, everyone abides by a different set of moral standards. We’ll spare you any philosophical posturing, but a logical follow-up question might sound something like this: “Who decides if a company is ‘moral’?” Ideally…you do, which is why it’s important to address SRI Funds, also known as ESG Funds.

Who decides if a company is moral?

One of the most important things to recognize when it comes to socially responsible investing is that there’s no “right way” to build your portfolio. It’s also important to recognize that the best investments don’t come by analyzing one’s heart. They come by analyzing the numbers. Of course, your decisions should be a reflection of your values, but oftentimes, you’re unlikely to find an SRI fund that is truly a reflection of those values.

What are SRI funds?

The first and most obvious way to go about socially responsible investing is to stock-pick. But you know how we feel about that, and if you don’t, this should give you some idea of where we stand: Why you should never buy stocks. Doing your own research and diving into the missions of publicly traded companies is a fun experience for some. It’s like playing the role of those guys in Wolf of Wall Street, but before you pat yourself on the back knowing that you’re making an impact while making a profit…pause. You might not celebrate big gains by doing drugs in the bathroom or throwing midgets against a velcro target, but when it comes to the financial industry, “social impact” can become a pretty abstract concept. The other, increasingly common (and increasingly flawed) way to go about socially responsible investing is to find a fund that speaks to you. There are a plethora of SRI mutual funds or ETFs that prioritize different things. Some are filled with women-led firms, others select companies with diverse boards. Environmental consciousness, sustainability, and the list goes on. Others try to exclude companies in the alcohol, tobacco, fast food, gambling, weapons, fossil fuel, or defense industries. The only problem: you’re unlikely to find that’s perfect, and here’s why:

Smoke and mirrors

SRI sounds awesome in theory, but most funds are advertised with the guise of upholding ESG principles and are in fact composed of large-cap stocks (such as big tech). For example, iShares ESG Aware ETF excludes companies with less favorable environmental records or less diversity on their corporate boards…which is great. So if you like your corporate boards like we like our botanical gardens - colorful and filled with women - this fund sounds like it would be a good bet. But they still hold many purely profit-driven companies, like Apple. So if you like your iPhones like we like our financial decisions - not made by children - you might avoid this one. All jokes aside, if this leads you to wonder about the viability of ESG Funds, your trepidation is by no means misplaced. Here’s where Stash Wealth stands…

Our stance on Socially Responsible Investing

As a firm, we are generally opposed to ESG investing. Why? Typically socially responsible investment funds are driven more by marketing than they are by sound investment strategy. ESG funds limit diversification for clients based on principles and guidelines that are not governed by industry standards and are oftentimes subjective. No one at Vanguard or Fidelity should be able to decide what “socially responsible” means on your behalf. That’s why it can be hard to rationalize an ETF that holds environmentally progressive companies while also holding Microsoft. They’re rarely consistent, and they rarely outperform the market. ESG funds also come with higher costs and higher risks.

The Stash Wealth stance isSRI funds are in some form or fashion a marketing scheme that has been conjured up by Wall Street to get clients to pay for more expensive funds. And those funds aren’t any different, let alone better, than their cheaper products.

We are willing to incorporate ESG funds into a portfolio if a client understands the risks and costs, but if you’re reading this article in an effort to blend impact with profit, there are better ways to go about doing so. As any gambler will tell you, you shouldn’t gamble with emotion, nor should you invest with emotion.

To get a better understanding of how to invest properly, check out the Stash Plan.