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Socially Responsible Investing

In recent years, socially responsible investing, or ethical investing, has quickly gained momentum.

Also coined as impact investing and sustainable investing, socially responsible investing considers the environmental impact, social implications, and corporate governance to select where and how to invest while having a positive societal impact.

 

“More recently, you’ve had very sharp uptick,” Peters said. From the beginning of 2012 to 2014, SRI assets in the U.S. grew 76 percent, to $6.57 trillion, up from $3.74 trillion. – CNBC

 

Socially responsible investing is estimated to represent $7 trillion in the U.S. and $21 trillion globally. This represents roughly 18% of the total assets under management in the United States, according to US SIF.

It is a very broad asset class given that it can represent any sectors or market cap. The funds currently offered range anywhere from environmental-friendliness to diversity to religious considerations.

The Barclays Women in Leadership ETN (WIL) for example, focuses on U.S. firms with women as CEOs or board members while the SPDR MSCI ACWI Low Carbon Target ETF (LOWC) focuses on stocks of environmentally friendly firms.

In terms of allocation, it is pretty much impossible to determine the assets of socially responsible funds unless you go through them one by one. If we look at the Low Carbon Target ETF (LOWC), for example, it highly resembles the Total Market ETF (VTI) and includes companies that are not necessarily socially responsible but that have a low environmental impact.

 

Top 25 Holdings of LOWC Top 25 Holdings of VTI
Apple Inc Apple Inc
Microsoft Corp Microsoft Corp
Johnson & Johnson Amazon.com Inc
Amazon.com Inc Exxon Mobil Corp
JPMorgan Chase & Co Johnson & Johnson
Facebook Inc A JPMorgan Chase & Co
Wells Fargo & Co Berkshire Hathaway Inc B
General Electric Co Facebook Inc A
AT&T Inc General Electric Co
Alphabet Inc C Wells Fargo & Co
Alphabet Inc A AT&T Inc
Bank of America Corporation Alphabet Inc A
Nestle SA Bank of America Corporation
Procter & Gamble Co Procter & Gamble Co
Pfizer Inc Alphabet Inc C
Verizon Communications Inc Chevron Corp
Philip Morris International Inc Pfizer Inc
Coca-Cola Co Verizon Communications Inc
Comcast Corp Class A Merck & Co Inc
Samsung Electronics Co Ltd Comcast Corp Class A
The Home Depot Inc The Home Depot Inc
Merck & Co Inc Intel Corp
Citigroup Inc Cisco Systems Inc
Cisco Systems Inc Citigroup Inc
Walt Disney Co Philip Morris International Inc

 

As shown above, the composition of the greener fund in comparison to the total market fund is shockingly similar. All tech, financials, and pharmaceutical companies remained. The definition of an eco-friendly company is still a gray area and I would personally not qualify Nestlé or Coca-Cola as green given that they highly contribute to the 50 billion plastic water bottles Americans used last year. In addition, the current Chairman and former CEO of Nestlé even deny that water is a fundamental human right!

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How to invest in socially responsible companies

 

On one hand, Walmart is a green company because it installs solar panels on its stores and recycles more than 81% of the materials used by their stores. However, it pays its workers unlivable wages and recently announced it would lay off over 16,000 workers.

Even Apple is considered a low carbon emission company even if it highly contributes to the 20 million tons of electronic waste produced every year. Not to mention the dozens of workers who committed suicide after intolerable working conditions.

If you want to only invest in socially responsible companies, you will have a hard time finding proper diversification. The Vanguard FTSE Social Index Fund (VFTSX) for example, has similar holdings but does exclude companies like the cigarette giant Philip Morris that is present in the Low Carbon Target ETF.

Being completely socially responsible is a hard thing to accomplish but on the other hand, can you have a significant impact?

 

Let us assume you would have $10 Million dollars to invest…

If you would directly invest in a high-pollutant such as Exxon Mobil, you would only own 0.00295% of this empire. With a total valuation of $339.02 Billion dollars, it is extremely hard to gain any important position where you could make a difference.

If you were to invest in the Vanguard Total Stock Market ETF (VTI) instead, you would own 0.00185% of this fund given its $541.30B assets under management. Out of that, only 1.35% of the fund is invested in Exxon Mobil. In the end, out of your $10 Million dollars, your total holdings in Exxon Mobil would actually be $135,000 or 0.000398% of the total value of Exxon. Your total contribution to this destructive company is inconsiderable.

If you wanted to invest directly in a green company or sector ETF and simply bought the Guggenheim Solar ETF (TAN), for example, you would have an impact but this may come at the cost of great returns. Holding only 23 companies with a median market cap of $1.1 billion, this fund offers very limited diversification compared to the 3578 companies included in the Vanguard Total Stock Market ETF (VTI). The trailing 5-year return for this solar fund was of -4.82% compared to 14.64% for the total market. The total return over the last 5 years was of -26.5% for TAN compared to 87.8% for VTI. Unfortunately, no data was available for longer periods of time but the volatility shows just how shaky this investment has been.

 

Is solar a good investment

 

I am not saying we cannot have any impact on the market but all this fun exercise was with $10,000,000 which is more than most of us will never have to invest. Even with this amount, this still had a minuscule impact on a single stock.

 

Be a good person

I think that the lesser of two evils is to invest in a total market fund to maximize your diversification and long-term returns while minimizing your implication in any given investment that would not qualify as socially responsible.

While investing in a properly-diversified fund such as Vanguard Total Stock Market ETF (VTI), you are putting all your chances on your side to maximize your returns over time and accelerate your wealth accumulation. Once you have enough to retire early, for example, then you can volunteer your time to the ones in need in your area and really make a difference. You could also donate to causes that matter to you and make an impact on that front.

Be good to the ones around you and make a difference with the actions you take every single day. The smile on your face can make someone’s day.

Xyz.

 

 

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8 Comments

  1. Totally agree. The reality is your impact through investing is largely an illusion. Money is fungible so if your money is sitting in a bank that loans money to a company antithetical to your cause, then your contributing to that company. In fact your doing so more then if you bought stocks since your buying most stocks from another investor not a company (i.e. Your money does not usually flow directly to the company.). Go be an activist, participate in a boycott on their products, or donate your time if you really want to have an impact.

    • Xyz

      April 9, 2017 at 9:17 pm

      Well, even if you are buying a stock from someone else, the increase in the price can still benefit the company. Plus, you can have voting powers, but as mentioned, your powers are so SO small that you are better off doing other good in the world around you.

  2. I feel (and this may be completely wrong) but companies that are more socially minded and are looking to do the right thing will be more successful in the longer term. Sure it might have an impact in the short term on profits, but they will outlast some of their less socially responsible peers.

    • Xyz

      April 11, 2017 at 9:56 am

      I agree with this over the long term. However, it is still very hard to invest solely in truly good companies so I prefer buying in the total market and let the whole economy grow, whether or not this statement stands.

  3. You are seeing more and more investment options when it comes to socially responsible investing. Growing up, I can remember just s couple of mutual fund companies that offered one fund to invest in. And most times it only avoided the classic sin stocks. Now more and more funds and ETFs are popping up. I don’t think this is a trend, the younger generation is truly interested in being smarter with our planet.

    • Xyz

      April 11, 2017 at 8:56 pm

      A lot of options are available but, from what I have seen, they either overcharge for management (high MER) or offer very poor diversification.

  4. Good write-up. I absolutely appreciate this site. Keep it up!

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