Investment funds: The challenge of ethical investing

“Peer under the hood of your mutual fund or portfolio of index investments,” said Ron Lieber in The New York Times, and you’ll probably find that you own shares in at least a few companies “that make you squeamish.” It may be gun industry stocks, or shares in big banks, polluting energy firms, or companies with questionable labor practices. “The good news is this: There are more opportunities than ever to invest with a conscience.” The amount invested in funds that consider environmental, social, and corporate governance issues—ESG, for short—hit $8.1 trillion in 2016, up from $1.4 trillion in 2012, and about 500 mutual and exchange-traded funds practice some form of socially conscious investing. “But with all these choices comes a fair bit of confusion.”

That’s because one fund’s definition of socially responsible “might not be a perfect match for the investor’s,” said Samantha Bomkamp and Lauren Zumbach in the Chicago Tribune. One mutual fund recommended by Illinois-based Rappaport Reiches Capital Management, for example, shuns companies that profit from gambling, nuclear weapons, pornography, land mines, tobacco, or stem cell research. “But the fund doesn’t specifically exclude firearms, or retailers that carry firearms.” There’s also the issue of deciding what you want your end game to be, said Derek Tharp in The Wall Street Journal. Investors can certainly “do well” through ethical investing; an analysis last year by TIAA found “no long-term, systematic performance penalties” for top socially responsible indexes relative to broad market benchmarks. But whether socially conscious investors are “doing good” is another matter. Some strategies may have little or no impact on the wider issue at hand. Divesting from fossil fuel stocks, for instance, might actually “increase the profit opportunities for investors who are not averse to investing in the industry.”

Rather than directing your investments in a particular way, you might consider simply redirecting your profits, said Mitch Tuchman in MarketWatch.com. Ask your fund manager to calculate the percentage of overall returns that come from companies whose activities or social policies you don’t approve of, and then “use that excess return to contribute directly to nonprofit causes” that address the issue. That way, you can “turn a company’s profits against it in a very direct and high-impact way.” Putting your money only in firms that follow certain ideals “is laudable,” said James Glassman in Kiplinger.com. But it’s not for me. “I am loath to outsource my own social conscience to a fund manager or an index compiler,” and given that I don’t mind casinos or fracking, “few ESG indexes have principles that match my own.” My advice: Skip the indexes and “confine your socially conscious investing to individual stocks.” Or try to give back with your returns as you see fit. ■