Capitalism has its advantages – companies strive to allocate scarce resources and create products that consumers use and enjoy. The best-run companies maximize shareholder value and make profits for their investors. They also create jobs and help employees make a living, provide for their families, and help them save for retirement. Investing in great firms can literally make you rich.
But focusing purely on the bottom line has some drawbacks, to say the least. Firms that spew chemicals into the air, let it seep into the land, fill ocean with plastic bottles, or grow to monopolies that abuse their market position, come to mind.
Socially responsible investing has grown very popular. It tries its best to help us determine which companies are up to no good and discover those that are truly doing some good for their customers, employees, suppliers, communities, and the environment (stakeholders). Environmental, social, and governance, or ESG investing for short, has attempted to help investors find companies that are built for good. ESG-related funds have grown to $2.7 trillion in assets and grew 12% last year, according to fund firm Morningstar.
ESG has become big money for Wall Street, but is it accomplishing what it’s set out to do? In many instances, no. One source counted more than a hundred compilers of ESG data and a recent Financial Times report relayed that Morningstar recently took 1,200 funds away from its list “after an ‘extensive review’ of their legal documents.” Firms that exaggerate or fake their ESG credentials are known for ‘greenwashing’ investors, and it’s more common than you think.
I’ve been on the lookout for the best way to help clients ensure their funds go toward making a “positive difference to the planet or society” that matches their goals, be it having a positive impact on the environment, supporting human rights, or simply not selling unhealthy products.
As with most investing, individual companies can accomplish both returns and ESG goals. The iShares Global Clean Energy ETF (ICLN) focuses on firms operating in the renewable energy industries. No matter one’s view on global warming, wind and solar power are in theory cheap, free, and abundant. Water shortages, especially out west, are real, and the Invesco Water Resources ETF (PHO) can help address these matters. If you can’t stomach the expense ratios on these funds, firms including Vestas, Orsted, TPI Composites, Siemens Gamesa, and Brookfield Renewable Corp are very interesting options. Contact me if you’d like some insight on what I find most investable currently.
Beyond your portfolio, there are some local ways to volunteer to help people and the environment. My involvement with Hamilton County Parks and Recreation has given me a love of the parks and commitment to land conservation. Carbon credits could help preserve parks and forestland for generations to come, proving that capitalism can support both profits and the greater good.