Aligning Values And Investing Easier Said Than Done

by | Oct 31, 2022 | *Financial Awakenings, Building Wealth, Fee Only Financial Planning, Investment, Weekly Column

Aligning your stated values and your spending is something I encourage as part of financial wellness. It isn’t always easy to do.

For example, someone strongly concerned about climate change will likely avoid buying items like bottled water, plastic bags, aerosols, chlorine bleaches, and disposable cutlery. They might drive an electric vehicle.

These same people often want to invest their money in firms that have policies to protect the environment. Other investors may be especially concerned about gender and diversity equality, fair labor practices, human rights, transparent accounting methods, integrity and diversity in leadership, or accountability to shareholders. This type of investment philosophy is referred to as Environmental, Social, and Governance (ESG) investing.

In recent years, ESG investing has exploded. According to a Wall Street Journal editorial on September 6, 2022, more than $20 trillion is invested in ESG funds. This accounts for 25% of all the professionally managed assets in the world.

On the surface, ESG investing is a worthy goal and certainly in congruence with someone that holds these values. Yet it is not as simple as it looks.

First, there is no universal agreement about the factors that define ESG. Each fund has its own set of criteria. “Just because the fund has ‘ESG’ in the title, it doesn’t mean it meets your definition of ESG,” says Jonathan Kvasnik, Cherokee Investments, quoted in a June 18, 2018, article by Robert Powell in USA Today“ESG funds: What you need to know about socially responsible investing.” It’s important to become very clear about your personal views on social issues, environmental policy, and corporate governance before shopping for a fund.

Second, some ESG funds are more about “greenwashing” (talking the talk but not walking the walk) than true ESG investing. Brian Waldner, a KFG financial planner and former portfolio manager with Columbia/Threadneedle, says, “There are two types of firms, those that practice SRI or ESG and those that market ESG.”

Third, you need to consider the potential monetary impact of owning ESG funds. While some ESG funds have returns that are a little better than owning an index fund, in my experience most do somewhat worse, largely because most have much higher fees than their passive counterparts.

Fourth, many ESG investors believe that by not owning the shares of an offensive company, they harm it by restricting its flow of capital. This is not the case.

Why? The only time a company benefits financially from a sale of stock is when it goes public (called an initial public offering, or IPO) or issues additional new shares to raise capital. These are rare events.

Most stocks are bought and sold in the “secondary” market through exchanges like the New York Stock Exchange. These platforms facilitate transactions between individuals or institutions wanting to buy or sell shares in a company. The money moves between the buyer and the seller; none of it goes to the company.

It’s no different when a company borrows money through issuing bonds. After the initial bond issue, the bonds are bought and sold on the open market, where none of the money paid or received goes to the company.

While it’s true that if no one bought a company’s shares on the secondary market, its stock price would certainly plummet, that is a remote possibility. Institutional demand for a company’s shares is not going away if it remains profitable.

The value of investing in companies that align with your beliefs may still be worthwhile for you. Yet the most effective way to influence companies you believe to be socially irresponsible is to boycott them. Refusing to purchase their products or services will make a bigger impact than refusing to own their stocks.

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