“Your green is somebody else’s brown.”
—Larry Swedroe
For the May 2022 issue of the AAII Journal, editor Charles Rotblut and I interviewed Larry Swedroe about his book with Samuel C. Adams, “Your Essential Guide to Sustainable Investing.” You can read the interview here!
As you’ve probably gleaned from my other blog posts about sustainable investing, investors are hitting many roadblocks on their way to finding companies and funds that are not only labeled as sustainable, but are truly acting on that label. With that in mind, I asked Larry whether having regulations set for environmental, social and governance (ESG) and sustainable investment labels would help.
Part of his answer made me hopeful for the future of sustainable investing: “There are a lot of people who say, ‘I really want to help the planet and I’m worried about climate change, so I’m going to screen out energy companies.’ To me, this would be a bad decision. We want to support companies that are creating technologies that improve the planet. The industry that’s working to create a greener planet (as it produces the most green patents) is the one that everyone vilifies: energy.
“If you screen energy companies out, you raise their cost of capital, making it more difficult for them to invest. A better strategy would be to use a best-in-class kind of rating system. This could lead you to consider investing in the energy companies that are making the most progress toward a greener planet.”
Just as the world isn’t black and white, with much room for gray and nonbinary thinking, the world isn’t divided into green (virtuous and sustainable) and brown (vice and sin) either—there’s a lot of muddiness in between.
Something that Larry stressed throughout our interview was that the individual investor is the one who must decide what their sustainable investing strategy looks like: “I don’t think there’s a right answer. There’s one right answer for each person, depending upon how deeply they feel about these issues and how deep into the weeds they want to get.”
One benefit of sustainable investing for me was that it really narrowed down my choices. There are thousands of things I could invest in, but once I made sure what I was putting my money into was sustainable, had low fees and was helping more than hurting the earth, I ended up with under 10 exchange-traded funds (ETFs) that fit those specific criteria at the time.
I’m still finalizing what my investing strategy will be, while also looking for future investments. Investing sustainably was my entry point, and I hope it helps you too!
Bonus: Part of our interview with Larry Swedroe is also available in video form! You can see what I look like inches away from a nervous breakdown, something I only share with my closest friends! Enjoy 😉
Why I Care About Sustainable Investing
If I had to pinpoint the exact moment that I started caring about the earth we live on and had a language to discuss it with, it would be when I enrolled in Dickinson College. Known for its sustainability, Dickinson College became a carbon neutral institution in 2020 and is highly rated by the Princeton Review Green Honor Roll. While I was there from 2012 to 2016, I appreciated the water bottle refilling stations, the college farm that contributed to campus dining services and local restaurants and the Center for Sustainability Education that instilled in students the importance of taking conscious action to sustain the earth.
That’s how the fuse was lit.
Within the last year there were two pieces of work that solidified and further propelled my sustainability mindset: “No Planet B: A Teen Vogue Guide to the Climate Crisis” edited by Lucy Diavolo and Lorde’s album “Solar Power.” The Teen Vogue collection “No Planet B” includes articles from 2016 to 2020, many written by teen activists for climate change. It covers the basics of climate change, the fossil fuel industry, how recycling plastic won’t stop plastic from ruining the earth, intersectionality—that is, the acknowledgement that everyone has their own unique experiences of discrimination and oppression, considering gender, race, class, sexual orientation, physical ability, etc.—with climate activism and the global impact climate change is having on indigenous people. In one article from 2019, we hear from Amanda Cabrera, an eight-year-old at a climate change strike in New York City who says, “We need the planet but the planet doesn’t need us.” All of these young voices are the ones who will be most affected by climate change, and they understand just how dire it will get if nothing is done to slow it down.
Another young voice affected by climate change is Lorde. Ella Marija Lani Yelich-O’Connor, known professionally as Lorde, is 25 years old and released her latest album “Solar Power” in August 2021. It’s an album inspired by her time spent in nature when she cut out social media and most of the internet in 2018. On the album, Lorde balances the knowns with the unknowns. The song “Fallen Fruit” is her most explicit on climate change with lyrics like “It’s time for us to leave,” the fallen fruit of the title signifying what little is left after prior generations’ development and damage of the earth. On the final song of the album, “Oceanic Feeling,” she sings about lineage of place and connection with the earth and its elements. She starts off by thinking about her ancestors, her past; and then to her brother, her present; and finally, she thinks about a daughter in her future. But will there be a world for that daughter in the future?
I remember reading “No Planet B” at the lake while listening to Lorde’s album “Solar Power” over the summer, feeling all of my big feelings about the earth and all the harm we have done to it that cannot be undone. Layers and layers of things humans have built on this earth, roads that connect us but also cause pollution, buildings that the majority of people can’t afford to live in, factories that only care about efficiency and profit and are pumping toxic waste into our air, into our water, into our lives. It doesn’t just disappear, it piles up—everything we have done to the earth will overtake humanity in the end. Corporations are the biggest producers of waste and yet most of the climate anxiety and call for sustainability is placed on the individual.
What can an individual really do to improve the world? I can start with putting my money where my mouth is. That means I’m not investing in Tesla or Amazon, to start. Other big corporations—including asset managers BlackRock and Vanguard that have had a huge hand in environmental destruction—are also off the table. And I’m not interested in investing much in cryptocurrency either—according to Digiconomist on Twitter: “During 2021 Bitcoin consumed 134 TWh [terawatt-hours] in total, which is comparable to the electrical energy consumed by a country like Argentina. Related CO2 emissions were ~64 Mt [metric tons]; enough to negate the entire global net savings from deploying EVs [electric vehicles].”
What I can do is research my investments before I put my money into them. That socially responsible exchange-traded fund (ETF) I think I found? It’s an iShares ETF, and iShares is owned by BlackRock. And its top 10 holdings are full of big corporations. Oh, and it’s mostly invested in military-grade weapons and fossil fuels! Many investments are masquerading as sustainable for me to feel better about investing in them, and I’m not going to fall for that.
There are many layers of sustainability to look for in an investment, including whether the company itself is investing sustainably, can sustain its business, is using and creating sustainable products and, at the end of the day, can also offer sustainable investment returns.
Though it will be a more difficult route, I’m going to find stocks and funds that create better ways of living for our future like efficient solar energy, wind power, waste reduction, pollution control and green transportation. Even though I’ll be investing for the long term, I want to take action now so I can make a larger impact in the future. There’s only so much an individual can do in the fight for climate change, but if we all care just a little bit it will make a world of difference.
If you’ve been inspired to look for sustainable investments, let me know what led you to this point—be it a book, an article, a discussion with family/friends or a personal experience in nature.
Read these next!
The Great Index Fund Diversion
Finding Index ETFs That Aren’t (Entirely) Killing the Earth
Finding Index ETFs That Aren’t (Entirely) Killing the Earth
I’m finally going to invest in something! And I actually kind of understand it!
If you read my post about my attempt to invest in index mutual funds, you’ll know that I failed miserably and decided to focus on index exchange-traded funds (ETFs) instead.
I started out by using AAII’s ETF Screener, and I selected “Yes” for socially responsible and index fund to make sure I was starting off with a narrow enough field.
The hardest part of investing in funds of any kind is not knowing exactly what you’re investing in, since most funds just reveal their top 10 holdings. Thankfully in an article on Vox—sent to me by our lovely managing editor Jean Henrich—I found a website called As You Sow that screens funds for actual environmental, social and governmental (ESG) compatibility.
So, I tested out a few tickers in one of As You Sow’s searches to see if the ETFs I was interested in actually fit my values and intentions for the earth. Spoiler alert: Most of them didn’t!
With these searches, no matter which one you use the results are broken down by categories and each category is graded. Looking at the Ecofin Global Water ESG ETF (EBLU), I found that it grades highly in almost all of the categories, meaning that there are little to no investments in stocks of companies that are profiting from the fossil fuel industry, deforestation, gender inequality, sales of guns and military weapons, the prison industrial complex and tobacco.
What I like about this tool is that you can pick and choose what’s most important to you. Let’s say there’s a fund that has a lot of investments in tobacco, but you’re not as concerned about that. If the fund has a lower grade for tobacco, then you would still be comfortable investing in that fund—unless you’re Don Draper in the fourth season of Mad Men:
Tobacco production also requires a lot of natural resources and uses chemicals that create pollution and can cause health issues for people in areas where it’s processed, so I’m glad the Ecofin Global Water ESG ETF doesn’t invest in it! Next, I looked at the Global X CleanTech ETF (CTEC). It has grades of A for everything except gender equality for which it received a grade of D. Here’s the breakdown provided on the gender equality search:
It’s well-known that the tech industry is not favorable or welcoming toward women, or anyone who is not a white man, so I expected the gender equality grade to be lower for this ETF. If I decide to invest in this ETF, I will keep an eye on its gender equality grade to see if it improves at all.
One thing that’s difficult about investing in ESG funds is that their past performance is not always ideal. Using AAII’s ETF Compare tool, I looked at how these two ETFs stacked up:
Ecofin Global Water has been around for almost five years, and has a mix of return grades, but Global X CleanTech has only been around for about a year so there isn’t as much return history to compare. (Two-thirds of all stock ETFs designated by Morningstar as being “socially responsible” are less than three years old.)
The return grades shown above are based on the ETF category average and comparing to category peers is key to understanding fund performance. Ecofin Global Water has a more favorable expense ratio and grade compared to its category average, but also has a grade of F for its category risk index—defined as the relative measure of risk by comparing the variation in total return for a fund over the last three years to the typical variation in return for all funds in its category. In other words, it’s a lot more volatile. So Ecofin Global Water might experience big price swings, but it is a relatively new ETF so it’s going to be a slight risk no matter what.
If I had to choose between these two ETFs, I would choose Ecofin Global Water because of its expense ratio and high ESG grades in all categories.
Have you tried searching for ESG funds? If so, what barriers did you run into?
I read this so you don’t have to! Investing 101 by Michele Cagan
I started reading at such a young age that it feels like I’ve been reading since I came into consciousness. Before I started reading by myself, my dad would read the Wizard of Oz series to me. But it was when he started the Harry Potter series that I took the first book from him one night and said, “I want to read this one.”
There were nights I would go to bed at 4:00 a.m. just to finish a book, on a school night no less! Nothing and no one could stop me, not my mom, my young eyes or the butt crack of dawn on the horizon. Reading is my preferred way to learn new things, so if you’re not a big reader, or don’t have the time for a whole book, you’ve come to the right place because I’ll be reading investing books so that you don’t have to!
“Investing 101” by Michele Cagan, CPA, is a book that my uncle gave me when I started working at AAII. Instead of reading it, I put it in my closet and never looked at it again—until now!
“Investing 101” offers a ton of entry point options for beginners. Cagan covers basic economics, stocks, bonds, mutual funds, exchange-traded funds (ETFs), styles of investing, investing in real estate, currency and commodity trading, education and retirement planning, socially responsible investing, how to create your investment portfolio and advice from professionals. If any of those aspects of investing interest you, Cagan does a good job of explaining things plainly but factually. If you click on any of the links in this paragraph, they will take you to a place on AAII.com where you can begin learning more about these investing ideas.
I was on alert for any descriptions of investing concepts that might help me build a portfolio, and Cagan introduces the concept of diversification. Diversification is an investing technique that acts as a safety net against how the economy might perform: “Different types of industries perform better during specific stages in the economic cycle. For example, some industries take off when the economy is expanding, while others actually profit more when the economy is in a slump. That means that investors can always find a way to profit in the markets, as long as they know where to look.”
Instead of trying to take a wild guess when certain investments will do well, diversifying what you hold in a portfolio means you won’t have to stay up at night thinking about how the economy will affect your investments. Instead, you can stay awake plagued by thoughts about the end of the world!
Some great advice Cagan included that I’m going to follow is to “avoid duplication. It is a waste of your investment monies to own multiple funds with identical objectives. It’s best to own just one fund in any particular fund category.” She also notes, “However, keep in mind that it’s usually not advisable to have more than six or seven mutual funds at a given time, or you can start to counterbalance your efforts to construct a strong portfolio.”
I gravitated toward the chapter on mutual funds and ETFs since investing in individual stocks right now is still intimidating for me. I think I could easily follow these guidelines that Cagan provides and start investing in mutual funds and ETFs. I’ll report back on how that goes!
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