How To Accomplish ESG Objectives Without Risking Your Retirement
Do you want to know what’s hot? ESG-based investing is hot. These factors include those dealing with environment, social and governance issues.
“No one wants to be the person who cuts down the last Lorax tree,” says Paul Tyler, Chief Marketing Officer at Nassau Financial Group in Hartford. “As much as we want to build our wealth today, how much can we really take with us when we die?”
As a result of this sentiment, there’s growing demand on the part of investors to buy products from publicly traded companies that support the causes they support.
“There is a potentially more effective way that consumers and industry leaders can make their voices heard beyond protesting and voting, and that is to focus on their investments,” says Richard Steel, author of Elevated Economics and CEO of Parsec Ventures in San Francisco. “There is already a massive push to see a change in Washington, ameliorate policing, achieve social justice, and to reduce carbon emissions, among other issues. One of the easiest and most effective ways to make change happen is to put your money where your mouth is. Investing in companies that are in line with your social and moral values is becoming table stakes.”
Not everyone agrees with the theory behind ESG-based investing. “Stock focused ESG efforts will never work,” says Jeremy Keil, a financial planner at Keil Financial Partners in Milwaukee. “You aren’t giving money to the company when you buy a stock, you are buying it from another person and giving them the money.”
Maybe this is why the Department of Labor (DOL) recently put the brakes on rampant selling of ESG-based investment products into retirement plans. As a result, it’s going to be harder to use your retirement account to buy investments designed primarily to promote any kind of social advocacy.
Just because the DOL has reined in the wild west of ESG-based investing doesn’t mean you don’t have choices. Steel says, “There are a myriad of non-investing alternatives that consumers have.”
A recent study concluded ESG-based investing “is not effective at achieving social goals.” Some financial professionals bluntly agree. “Skip stock-focused ESG,” says Keil. “Take the extra money and time you’ll gain back by not bothering with it, and give that money and time to the charities and causes you support.”
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Don’t think it’s just about giving away your money. You can take other actions in support of your favorite causes.
“To promote ESG outside the investment sphere, one could participate in the sustainable/ESG economy from a consumer standpoint (e.g. purchase roof solar power),” says Craig Jonas, CEO at Denver-based CoPeace.
You can think of this in terms of promoting (by buying the stock), or you can think of it in terms of avoiding (by not buying the stock).
“Consumers have been shunning brands that don’t align with their values and business has been listening and making real change,” says Steel. “To more align itself with its customers, Unilever will spend $1 Billion Euros cutting fossil fuels from its detergents.”
Bear in mind, you can go beyond viewing this merely from the perspective of a philanthropist or a consumer. It may be a bit riskier, but you can also take action as an employee.
Steel brings this up in an example of employees refusing to work in response to climate inaction by their firms. “Amazon staffers who walked out from the company’s Seattle headquarters were said to have been joined by employees from other major companies, including Google, Microsoft, Apple and Facebook. Amazon then pledged $2 billion to the climate crisis,” he says. “Another example is when Walmart recently set not only a zero-carbon goal, but announced its goal to become a ‘regenerative’ company.”
Here’s the thing when considering alternatives for using your investments to make a statement directly: If your investments (whatever they are) produce really successful returns, your investments can help you indirectly in your pursuit of your favorite causes.
“Why bother with ESG?” says Keil. “Get the higher gains from regular investing, and donate the difference to causes you care about.”
Maybe you can even gather together a group of people who share your thoughts. In the process, that group can take the lead in promoting ESG in a non-investing manner. “They can focus on buying goods and services from ESG compliant companies,” says Randy Carver, President of Carver Financial Services Inc. in Cleveland.
Ironically, taking actions outside of your portfolio, assuming you’re joined by like-minded people, may make those ESG companies great investments. If everyone is buying from ESG-compliant companies, their revenues will no doubt increase. (Though it’s vitally important to appreciate the difference between the impact of revenues vs. profits when it comes to a stock’s price.)
In a nutshell, rather than expend time, energy and money in understanding ESG stock screening techniques, you’ll serve those you advocate for more effectively and efficiently when you “Donate money, volunteer and support local and global groups,” says Tony Lidde, CEO of Prosper Wealth Management in Wausua, Wisconsin.
You don’t want others to risk your retirement comfort to make a point. Maybe you should think twice before doing so, too.