“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 😉
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?