By Richard Eisenberg
This article is reprinted by permission from .
One hot trend in investing today, and one you may want to embrace if you haven’t yet, is investing in ways that represent your values.
The practice is often called ESG investing (environmental, social and corporate governance) , though some dub it socially responsible investing or, in certain cases, impact investing. Years ago, the name was “ethical investing.”
Leading the charge toward socially responsible investing: women. A June 2022 survey by the financial research firm Cerulli Associates found that 52% of women would rather invest in companies that have a positive social or environmental impact; 44% of men felt that way.
“Women want more than just financial return,” Janine Firpo, author of “Activate Your Money” said on the “ Friends Talk Money” podcast I co-host with Terry Savage and Pam Krueger. “We’re realizing that when we invest our money in the things that we care about, it makes our money more meaningful to us.”
Krueger, founder of Wealthramp , a firm that vets financial advisers, says advisers tell her that “the clients who are asking these questions [about socially responsible investing] are women.” And, she adds, “lots of women who are close to retirement or already retired seem to want to make a difference with their money.”
More investments to choose from
Investing this way is becoming much easier to do.
Every major mutual fund and ETF company now sells ESG products. And according to InvestmentNews , U.S. mutual-fund companies last year came out with 70% more of them than in 2020. Similarly, nearly two-thirds of new ETFs last year were ESG-focused.
Roughly two-thirds of financial advisers now use ESG products, InvestmentNews Research has found. A year ago, 59% did.
The Biden administration is expected to reverse the Trump administration’s limits on ESG investing in retirement plans this summer, too.
That’s apt to make it far more likely that your employer’s 401(k) or 403(b) retirement savings plan will offer at least one ESG choice. Currently, according to a 2022 Bank of America study of the 3.1 million participants in the employee benefits programs it runs, only 11% of 401(k) plans offer ESG-focused funds to employees.
ESG is not well-defined
But investing to follow your values requires more than a little caution, especially if you’re interested in buying an ESG mutual fund or ETF. That’s because financial firms have a lot of leeway in determining what they mean by ESG investments.
For some funds and ETFs, it’s about what they don’t invest in. For others, it’s about only owning stocks in a particular sector, like green energy. And for others, it’s about holding stocks with top ESG ratings, though the data underlying ESG ratings, Kenneth Picker and Andrew King recently wrote in the Harvard Business Review , “are incomplete, mostly unaudited, and often dated.”
Some critics have names for sales and marketing efforts that play fast and loose with ESG definitions: “doublespeak” and “ greenwashing .”
Read : Here’s how much ‘greenwashing’ can shave from company earnings
To clamp down on that, the Securities and Exchange Commission has proposed rules restricting the use of the term “ESG” by fund companies and ETFs. SEC Chairman Gary Gensler has said: “What we’re trying to address is truth in advertising.”
The SEC is also expected to start requiring public companies to provide fuller disclosure about their environmental, social and corporate governance practices .
Keep in mind: your own definition of what might be good or bad for the planet might be much different than the one used by particular ESG fund managers and ratings firms and public companies.
It’s also hard to know whether a company’s self-declared ESG approach is actually working.
As Stanford finance professor Amit Seru wrote in The Promise and Pitfalls of Investing for Change , an article on the university’s Graduate School of Business website, “Good luck measuring the impact of an investment on social or economic inequality. The data are messy, crude, and measured with a lag.”
