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Be good, make money
February 9, 2019
Historically, successful investing has often appeared to require setting aside one’s moral compass. How a company did business and the extent of its impact on society were not always a consideration in investing decisions, except in unusual cases. Investing based on one's conscience would have even have been discouraged by investment professionals. However, there is a growing movement against these old school lines of thinking. The biggest factor of change is the coming of age of millennials who are more likely than previous generations to ask for more morally acceptable investment options. They generally want to see their money make a positive impact, or at a minimum not make a negative impact, on their world. This is usually called Socially Responsible Investing (SRI), Environmental Social Governance investing (ESG), sustainable investing, or impact investing (I use the terms interchangeably here). An increasing number of studies are debunking the old-style stereotypes. For example, MutualFundObserver.com highlights a survey of over 2000 studies on ESG investing. 90% of the studies found that there was no negative impact to returns by investing with ESG criteria, with most studies finding positive investment impacts. Meanwhile, specifically on the environmental front, Jeremy Grantham, co-founder of asset manager GMO, pointed out that excluding an entire sector, whether it be the energy sector, from the S&P 500 index of American stocks does not make much difference to its historical long-term returns. Therefore, he argues that energy stocks, or any other sector, can be safely excluded from your investment universe. Investment research provider Morningstar comes to similar conclusions.
What are the options for investing more consciously?
Thankfully, available options are expanding for small investors as more institutions have started offering a growing array of diverse investment products. Unfortunately, not all major institutions have offerings that can be deemed socially responsible. Funds with the terms “ESG”, “SRI”, “sustainable”, “impact” or similar-sounding words in their names are probably socially-conscious investment choices, while others explicitly state they do not invest in fossil fuel related companies. Morningstar is an excellent resource and provides good commentary on timely sustainability issue like the ongoing controversy surrounding automakers Nissan and Renault. A useful feature of Morningstar's Canadian and American websites is the Sustainability Rating, introduced in 2016. It shows how a fund ranks when it comes to socially responsible investing. This is particularly when funds that don’t explicitly say they do socially responsible investing. In short, options for conscious investing of any kind are expanding and the benefits come with little or no cost.
It is getting easier to be good and make money at the same time.