Did you know you can use your investment dollars to advocate for climate change solutions? Investing to reverse climate change – in your 401ks, IRAs, or personal accounts – is easier than it may sounds and a powerful way to vote your values.
Sustainable investing – investing in companies actively addressing climate change – has exploded in recent years amongst large institutional investors. At the same time, it’s been on the receiving end of misguided political efforts to limit what you know about and how you can choose stocks based on their Environmental, Social, and Governance (ESG) practices.
What’s been lost in the shuffle is what ESG means for individual investors, who now have more options than ever to invest in mutual funds and ETFs. With hundreds of options, each using their own language and deploying slightly different strategies, aligning your investments with your values can be challenging.
But you can make sense of your options and find a fund that generates returns while supporting your desire for a healthier planet.
Narrow Your Options
While, in theory, it’s good that hundreds of funds are out there with sustainable labels, it can also make choosing a fund a daunting task. Make it easier by starting with your current fund provider.
Wherever you have your money – Fidelity, Vanguard, Blackrock, etc. – sustainable options will likely be available. That’s a great place to start because it’s the easiest way to change your investments. Look at what they’re offering to see if they match your needs. Some of the specialty fund providers mentioned above can also be accessed through some of these larger platforms.
If you don’t like the options from your current provider and are willing to move your money somewhere else, US SIF, the Sustainable Investment Forum, provides a list of funds you can use to identify other providers. Start with the tool using the filter to examine funds by assets under management or inception – larger and older funds have attracted those investments and lasted as long as they have for a reason.
Identify your “fighting style”
There are lots of ways to have an impact on the world. How do you like to fight for change? We like to think of this as choosing a “fighting style.” There are three common styles for which the investment industry has created strategies.
Fighting Style 1: Avoiding
Do you want to divest from fossil fuels? That’s the “avoiding” fighting style, and you’ve got company – many investors and prominent institutions are doing just that. For example, over 100 colleges, including Harvard, Princeton, and Georgetown, have removed fossil fuels from their investment portfolios. Many mutual funds and ETFs avoid fossil fuels.
Use fossilfreefunds.org from the shareholder advocacy group As You Sow to evaluate your current funds and check out new fossil fuel-free options. Most major fund providers offer t, and these strategies may have relatively low fees compared to other sustainability-focused funds. If your brokerage isn’t making it easy to identify funds that divest from fossil fuels, call them up – they should be able to help you find something that meets your needs.
Fighting Style 2: Rewarding
Maybe you prefer investing in companies trying to do good – perhaps by reducing their carbon footprint or leading their industry’s efforts to limit fossil fuel use. That’s the “rewarding” fighting style, and you’ve got a lot of options. A challenge here is that defining “good” is subjective, so you will want to understand how your fund provider defines and measures the benefits. Still, plenty of organizations are rating companies based on their sustainability practices. Find a match to your values and use those sources to judge your portfolio.
A good example is MSCI’s ESG Ratings and Climate Search Tool. For example, when looking at Amazon, MSCI gives them an “average” grade on ESG, saying that while Amazon has a good carbon footprint, there are serious concerns about labor management and corporate behavior that bring down the company’s ESG rating. You can use these ratings when looking at companies on your own, and in fact several mutual fund providers use third-party rankings like MSCI to select stocks. Other fund managers have their own well-defined criteria for sustainable investing, including industry stalwarts Calvert and Parnassus Investments.
Fighting Style 3: Engaging
Finally, you can push for change in companies you support with the “engaging” fighting style. Mutual fund managers can often influence the companies they invest in at company meetings and by making data requests. They can go a step further by voting for sustainability-related policies at annual shareholder meetings – or perhaps even introducing climate-focused shareholder resolutions for the ballot.
The engaging style had its biggest moment, so far, in 2021 when shareholders replaced three members of the board of directors at Exxon with more climate-conscious directors.
You can act, too, by becoming an activist shareholder. It’s probably a good idea to focus on one company, to understand its policies, and publish your thoughts for other shareholders to use in their decision-making.
The Manhattan Institute’s Proxy Monitor is a helpful tool to see what issues are being voted on and who’s leading the charge. If you’re interested in this style, you’re more likely to want to invest through a specialist provider who focuses on proxy votes and engagement – investment firms like Arjuna Capital, Domini, Green Century, and Trillium are particularly active shareholders.
It’s important to note that these fighting styles are not exclusive – many funds will combine all three. But understanding them can help you decide what’s most important to you and guide your choices when picking a fund.
Be a great greenwashing detective
Greenwashing in financial services is a huge problem. A firm may talk a green game but continue to invest heavily in fossil fuels. For example, Deutsche Bank was fined $19 million because it misrepresented its ESG investment practices. BNY Mellon and Goldman Sachs also paid smaller multi-million-dollar fines over similar practices.
You don’t need specialized expertise to understand how a fund designs and executes its ESG strategies – their regular commentary on fund performance needs to make sense to you and fit your fighting style.
Greenwashing is easy to avoid if you want to be a discerning consumer. Simply asking two fundamental questions – does the fund say what it does and do what it says? – can guide you away from potential greenwashers. Look for clear and easily comparable information from companies. If the fund hides behind a lot of proprietary jargon or it’s unclear why they invest in the companies they do, move on to another, more transparent fund.
Overall, the investment industry has a spotty record for transparency and sustainability at best – make sure the company you choose is doing a good job of explaining themselves and maintaining a high level of trust.
Don’t let the perfect get in the way of the good
Choosing an investment is a long-term decision, but it’s not a forever decision. Options are constantly evolving, your financial situation can change, and regulatory discussions are shaping what’s available. If you find an investment you’re comfortable with, don’t be afraid to choose.
You can always come back in a year or two and revisit your decision – you should rebalance your portfolio regularly to achieve solid returns. Keep an eye on the ESG goals and ongoing performance against sustainability commitments to understand the impact of your investments.
After all, this is your money we’re talking about here. Shouldn’t you know what it’s doing for the world?
About the Author
Ben Vivari is the co-founder of Till Investors and the co-author of Sustainable Investing: An ESG Starter Kit for Everyday Investors.