Welcome to Progressive Pockets! I go by GG, that’s short for Genet Gimja and I’m your host as we explore the topic of how we can align our values, our beliefs, our desires for the world around us and what we do with our money on a daily basis.
So maybe you’ve been considering getting into some socially responsible investing, some impact investing, some ESG investing, these are a bunch of terms that by and large generally just mean that you are trying to consider more than just the profit of your investments, but whether you are investing in companies that are working according to some of your values.
And there are a lot of ways you can do this, you can do it yourself, you can work with a financial advisor, you can pick index funds and ETFs that are put together according to certain values, for example, there are lots of green index funds with a climate focus if you want something easy and accessible.
But what are the pros and cons of adding an impact lens to your investments? Let’s go through them.
CONS
1. You have to pick some values to focus on.
You can’t just decide “Ok I want investments that are societally good.” What does good even mean? Is your definition of good and my definition of good the same? You’re going to want to be more specific. There are also some values where the data is more available than others. For example, if you’re concerned about the environment and climate change, it is easier to find investments that have been screened for that compared to say racial or gender equity. Not that you can’t find those investments, just that it isn’t quite as easy
2. You have to pause and do some research. (stocks and advisors)
If you’re looking for socially responsible index funds you’ll have to do a little bit of digging, the big investing firms have them nowadays, you’ll want to see what they have available and what criteria they used to include some investments and exclude others. You’ll want to look at the fees and decide if you’re OK with it.
If you are someone that prefers to work with a financial advisor, you’ll need to do a little more research to make sure that you’re finding an advisor that works with investors that have their values in mind. There are more and more advisors who are advertising this skill, so it is certainly possible, but it will require a little bit more research. If you’re looking for a new financial advisor that is fee based and will work according to your values check out a website called ValuesAdvisor.org
3. You are going to be disappointed. You probably aren’t going to find investments that are 100% aligned with your values.
There aren’t really perfect investments out there, perfect in the sense of being 100% completely harmless to society. That isn’t how our stock market works, that isn’t how our modern economy works. If you find a company that lines up with your values in terms of gender equity, you might find a part of the value chain where they don’t really meet the standard we want, or maybe they do, maybe when it comes to gender equity you are on board but then you aren’t really happy with their climate impact. That is going to happen. You might be disappointed with the limited number of metrics that they are publishing, you don’t feel like you’re getting a full enough sense of their impact according to whatever values you have prioritized. It’s disappointing! So that’s the third con. It isn’t going to be even close to perfect. It isn’t even going to be great, it’s probably just going to be BETTER.
4. You might pay fees that are higher than for non-impact investments.
The expense ratios are higher for managed portfolios and for the index funds and ETFs that are labeled as socially responsible, they will probably have an even higher expense ratio. That kind of makes sense right, they are actively managing the portfolio to include and exclude stocks according to how they are measuring up to some socially responsible type of value metrics or ESG ratings, in addition to the typical monitoring of their financial performance. So there’s extra management that’s required and there’s an additional expense ratio. There are still many investment options with expense ratios that are still low.
So those are 4 trade offs, 4 cons.
But a tradeoff that you probably won’t really experience in a noticeable way are the returns. Time and time again, the research has indicated that socially reponsible investments perform as well as other investments. Specifically for investments with really strong ESG ratings, they tend to perform better than standard investments. If you’ve been listening to the show for a long time, you already knew that, you can go back to Episode 76 The Surprising Truth about what ESG investing actually means.
Now let’s talk about the pros of socially responsible investing.
PROS
1. Our money will be working in alignment with your votes, your activism, other work you’re doing to create the type of world you’re trying to live in.
2. Our money will be registered as interest. The more of us that buy these products, the more the industry wakes up and realizes we’re serious about trying to make some impact.
3. You might sleep a little better at night. I think the only thing more stressful than laying in bed at night and thinking about all the problems in our world is feeling like I’m complicit in those systems. That I’m not doing anything at all. But you know what feels good is to look a problem in the eye and to say, I’m going to do what I can. Doesn’t that sound good? Doing what we can feels good. And another thing- reducing the cognitive dissonance between what we say we believe and then what we actually do, I think will also lead to greater inner peace.
So those are the pros and cons of socially responsible investing. To recap:
4 cons:
- You have to do the work to choose your values
- You have to do your research
- The investments that are available are probably not 100% your values
- Fees might be higher which will eat into your returns
3 pros:
- Your investments will be in more alignment with your other world building work.
- We’re creating demand for the type of products we want to be available.
- You might feel more at peace with your money.
I’m going to include a link to a Forbes article that inspired today’s episode. In it, you’ll find some of today’s discussion as well as a pro that surprised me. The writer, Kate Ashford, suggests that if we put our money into ESG investments, we are more likely to stick with our investments even when the markets are turbulent. I don’t know, that one didn’t really resonate with me, what about you? I’ll leave a link, drop me an email anytime.
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I hope you have a great rest of the day. Here’s the quote for the day.
“Action is the antidote to despair.” That quote is from Joan Baez
Let’s talk again soon!
https://www.forbes.com/advisor/investing/pros-and-cons-of-esg-funds/