I’m gonna be honest. It’s hard to open an internet browser and not feel like a helpless
passenger on the hot-mess express. Even before COVID, issues like climate change, human rights
violations, systemic racism, and corporate abuse have left many of us feeling cynical
and helpless.
And if you’ve taken a look at your investment portfolio, you almost can’t help but ask
“Are my investments making these problems even worse?” It’s a fair question. On
one hand, the whole purpose of investing is to grow your money. On the other, the cost
of those profits might be quite steep -- on both society and the planet.
So, do you continue to take part in this system no matter the cost? Or is there a better way?
Can you really make an impact with the way you invest?
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The bedrock of capitalism is the motivation to make a profit. But there’s always been
some fringe group that felt there was more to consider. All the way back to the late
1700’s Colonial America, subsets of Protestantism like the Methodists and Quakers let their
moral and religious beliefs guide their investments. To them, industries around slavery, alcohol,
and tobacco were immoral, and they actively avoided investing any money in them. And there
you have it, the concept of “impact investing” was born in America!
For centuries, “Socially Responsible Investments” or SRIs as they came to be called, were synonymous
with religious and moral values . But in the 21st century, the concept of impact-investing
began to fundamentally change with a new acronym; “ESG”.
First coined in 2004 by a UN-commissioned report titled “Who Cares Wins”, ESG stands
for Environmental, Social, and Governance criteria that can help an investor assess
the financial strength of an investment in the modern world. That is to say, more than
just being “wrong or right” in a moral-sense, choosing companies that score highly on ESG
criteria results in a better investment - for society, the planet, and your pocketbook.
Over the past decade, major ratings agencies began assigning numerical ESG scores to ETFs,
mutual funds, even individual companies. And while there’s currently no single uniform
rating standard, by looking at the scores of several agencies, and understanding how
they calculate their scores, you can gauge the relative impact of your investment.
So what might have a positive or negative impact on an ESG score? Well, the ‘E’
focuses on factors like natural resource use, pollution and sustainability initiatives.
Companies that make positive steps to reduce their carbon footprint or utilize greater
renewable energy sources will benefit from a higher E score.
The “Social” aspect refers to corporate behaviors that impact the public. For instance,
In 2019 when Walmart decided to stop selling certain types of ammunition in response to
recent gun violence, surveys found that people were more likely to shop there shortly after
the decision, not to mention giving a small boost to their S score.
And “Governance” is a measure of the ethics and transparency of a company’s leaders.
The doctoring of Volkswagen’s emissions tests and Wells Fargo’s fraudulent account
openings damaged the public trust and damaged their “G” scores.
How much of an impact can this approach actually make? Take an example from the 1960s and 70s.
American university students and teachers had begun protesting apartheid in South Africa.
But momentum really began to build when they pressured their schools to completely stop
investing their endowments in South Africa.
This is known as protest divestment, and was a radical move when you consider that between
⅓ and ½ of the S&P 500 did business in South Africa. This culminated in 1986 when
Congress banned any new U.S. investment in the country, resulting in a Billion dollar
loss in capital for South Africa. The economic fallout coupled with the decades of political
resistance finally led to the end of apartheid in the early 90’s.
Today, more and more companies are beginning to take the ESG movement seriously. One study
found that a third of American companies say ESG ratings are shaping their overall business
strategy. Larry Fink, the CEO of the world’s largest investment firm, Blackrock, wrote
in his annual letter that “every company must not only deliver financial performance
but also show how it makes a positive contribution to society.” And at the World Economic Forum
in Davos this year, major financial institutions made a big show of removing carbon-heavy investments
from their portfolios.
But let’s talk hard numbers here: does investing with your conscience hurt your returns? Not
necessarily. A recent Morgan Stanley study compared returns for over 10,000 funds between
2004 and 2018. The study found that there was no financial tradeoff at all between impact-focused
funds and their traditional counterparts. Furthermore, these funds seemed to offer even
lower risk, especially through turbulent times like this past year. This might be because
sustainable practices make companies less vulnerable to things like ethics scandals
or a massive oil spill.
Simply put, focusing on ESG is good business for the long term. And while impact-oriented
funds have long been derided as more expensive than their counterparts, their recent rise
in popularity has driven major fund companies to enter into a price war to offer the cheapest
ESG funds. Blackrock and Vanguard have ESG funds as cheap as $2 per year for every $1,000
invested. While still slightly more expensive than a pure index fund, due to the need for
ESG analysis, the difference seems to shrink with every passing year.
So how do you get started? If you’re a DIYer, you can make your own custom-tailored portfolio
of positive-impact stocks based on their ESG ratings. Online tools like Sustainalytics
allow you to compare ESG ratings for any publicly traded stock. There are also hundreds of ESG
mutual funds and ETFs. Some are broad in scope like Vanguard’s ESG U.S. Stock ETF, while
others have a focus that is made obvious in their ticker or name. For example, there’s
the SSGA Gender Diversity ETF that favors a high proportion of women in executive positions;
or the iShares Low Carbon Target ETF that focuses on companies with a small carbon footprint.
The year 2020 left a lot of people sick of the status quo, longing for a change.
And in 2020, ESG-funds also saw record-breaking inflows from investors wanting to build a
better tomorrow.
So the question is: will you be casting a vote?
And that’s our two cents!
Hey everybody! Hello! So we're here at the end of the video to address some comments
and questions from our last video about how your cellphone is ripping you off.
I actually learned a lot just looking through the comments of how different data is priced
in different countries. We have a huge amount of people who I know watch us in India, big
shout out! And your data plans are really cheap and I'm jealous.
So let's start with Brent. He said, "I know friends that have unlimited data just so they
can stream spotify premium on the road. Just download your music to your phone and listen
to playlists, or the radio, or podcasts. Netflix allows you to download on wifi and watch later
without streaming." I honestly forget about the ability to download
all the time. A little bit of planning can make it so you
don't really need unlimited data. But also if you do some planning about how you use that
data of downloading videos or downloading music, it can really be doable.
Dan said, "I was expecting a talk on how we buy expensive phones with features most of
us don't use, only to keep them a limited amount of time. Or how much time we lose with
phones." This is really touching on the behavioral
financial aspect of this. I know a lot of us are really really guilty of doing that,
right? Maybe once I buy that, then I'll use the super-expensive feature on the phone,
or all of this storage. And it's just sort of an emotional decision.
But I think talking about how much we're spending on the phone itself is a great suggestion
to look at for a future episode. Thank you! Finally, I wanted to highlight what Nicholas
Shepherd wrote. He said, "One place I cannot recommend highly enough for reviewing different
plans is Whistleout..." which is a website that compares many different data plans from
different providers based on what you need. So I did a little bit of digging on this.
I had never heard of this so thank you. So it seems like it's pretty legit. Let me know
if you've used it in the past. After we made this video, I was like, "We've
got to do this on ourselves, " because, legit, we spend way too much. And I just never think
to challenge it. It's just one of those ones where I'm like, "Well I guess I just need
this because we're on our phones all the time." We're committed. We're gonna do it.
And, we will see you next time! See you!
Bye! Before you go - you should check out Terra,
a new channel from PBS Digital Studios with a bunch of great science shows. You can travel
to Antarctica, fly with drones, and get a glimpse inside of a wildfire -- all on one
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