The Key to Sustainable Investing That's Good for the Planet? Homework

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For investors who want to be sure the money they are putting away for their own future—for a home, for raising kids, for retirement or just for a rainy day—is also helping the future of the planet, it’s never been more important to look behind the glossy ads and self-serving press releases companies use to tout themselves as “Green.”

“We all want that triple bottom line: people, planet and profits,” says Steve Mezzio,  a long-time proponent of sustainable investing, and executive director of the Center for Sustainable Business at Pace University’s Lubin Business School in New York. “The problem is you want to do good, and at the same time, you want to make money.”

So fund managers tout products with decent returns and claim they are “new energy” funds. But to get the returns they want, they also just happen to contain a couple of oil companies.

“The financial services industry is duping the American public with its pro-environment, sustainable investing practices,” Tariq Fancy, the former head of sustainable investing at BlackRock, the largest asset manager in the world with $8.7 trillion under management, wrote in USA Today last year. (VICE News has also covered the subject, called “greenwashing” by activists.) “Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction.” With so many companies greenwashing their activities, Fancy wrote, few are actually doing what’s needed to reverse climate change.

In one of the most glaring recent examples of Greenwashing, one of the world’s largest fossil fuel companies launched a global advertising campaign touting its efforts to build windmills and install solar power. But as environmental advocacy groups pointed out to regulators, a large portion of the company’s revenue still comes from drilling and selling carbon-belching oil and gas. Eventually, the oil company canceled the campaign, earning itself a black eye with investors. But it is still touting efforts to make its oil and gas operations “carbon-neutral,” even as the fossil fuels it pumps and sells are the leading cause of global warming.

Some funds simply sell off their investments in fossil fuel companies, but Boris Khentov, Senior vice-president of operations at Betterment, which offers a range of environmentally responsible investment options, argues that’s just another form of Greenwashing.

“There are powerful incentives for investment managers to expunge the familiar fossil fuel companies and call it a day,” writes Khentov in this piece on Betterment’s website. “This goes a long way towards providing an investor with emotional satisfaction, but it ignores the complex enmeshment of fossil fuels throughout every sector of the economy.”

“By excluding companies holding fossil fuel reserves,” he continues, “ex-Fossil Fuel indexes are effectively concerned only with future, not ongoing emissions,” which does little to help rein them in. 

As Fancy points out, risk managers are focused on protecting their investment portfolios from the harm a worsening climate does to their portfolio, rather than ensuring the companies in that portfolio “help prevent that damage from occurring in the first place.”

The first thing an investor interested in not spending on funds that aren’t what they claim to be needs to do is choose how they want to make an impact. Socially Responsible Investing portfolios are built to support companies that share your objectives—from funding green projects to promoting gender diversity. As VICE News recently noted in “The ABCs of ESGs,” these are often grouped into three baskets: 

• Climate impact - funds or portfolios that support companies that have lower carbon emissions or help others to lower theirs or that fund green projects from reforestation to ocean stewardship;
• Social impact - funds or portfolios that invest in companies actively working to empower minorities, reduce wealth gaps or increase gender diversity, either with their own workforce or products or with donations and charity
• Broad impact - funds or portfolios that consider all three ESG elements from the environment to ethical labor practices to greater board diversity and corporate transparency.

Then the hard work begins.

“You’ve got to look beyond the financial product and the labeling on it, and at the companies themselves that make up that fund,” says Mezzio, who recently studied self-described sustainable debt instruments. “There are 20 different labels and no one is vetting them for accuracy: blue bonds, catastrophic bonds, climate bonds, forest bonds,” he added. “So the first thing an investor needs to understand is that this is the wild west. There’s lots of jargon and no standardization of terms.”

And it’s not just Greenwashing. There’s social washing and even governance washing, as companies tout the practices that align with investors’ newfound desire for socially responsible investing.

Getting real info on a company’s ESG profile means digging deep into their financial statements, on websites like Yahoo Finance or the Securities and Exchange Commission’s EDGAR website, and researching what environmental and other watchdogs have to say about the company. Sometimes, a juicy news story will weave all the pieces together, but more often, this kind of work requires sifting through a dense thicket of disclosure documents that firms are required to file with regulators, to disclose any climate-related risks they face. 

Fortunately, the biggest enforcer of them all, the U.S. Securities and Exchange Commission, is going to be doing a lot of that work for you. The SEC formed an special task force last year to investigate ESG violations, that is going to focus on just these issues: “2022 will see a great degree of SEC enforcement action seeking to curb over-zealous marketing language or statements that it sees as greenwashing,” says Jonathan Gardella, a partner at CMBG3, a Boston-based law firm that focuses on regulatory and ESG compliance. 

Even if you want to hand off most of the research to your investment adviser, there are still tough questions to ask before you can be sure your investments are actually doing good.

“It really comes down to asking questions and really understanding that if you are relying on a particular asset manager, you really need to know if the people running those funds are walking the talk,” says Susanne Katus by phone to VICE, Vice President for Brand and Business Development at Datamaran, a software platform that tracks ESG risk for corporations.

”Do they have standards in place? Is that based on real due diligence and research of their own, or on third-party rankings, which can be a bit dubious if you don’t know how to navigate them. And if you really want to do good, you need to ask if the asset managers are actually voting your proxy on the things they purport to be supporting,” advises Katus.

Fortunately, there are some online tools that can help you get to the bottom of it: MSCI, an industry-leading provider of financial data and ESG analytics that has served the financial industry for more than 40 years, keeps data designed for investment professionals, but could be worth perusing, and keeps a close on ESGs. 

One of the most popular and easy-to-use tools is the online investment assessment tool from AsYouSow.org, “a non-profit foundation chartered to promote corporate social responsibility through shareholder advocacy,”  called “Invest Your Values.” As You Sow promotes what it calls its “theory of change,” that forcing corporate leadership to address the impact of their policies and actions actually reduces the risk to corporations and shareholders.

 “Companies that view the world not in months, but in years, decades, and generations will be able to reduce their long-term risk and ensure success,” the organization notes. “Shareholder actions press corporations to undertake this broader risk analysis and make decisions that benefit people, the planet, and profit over the long term.”

This content was paid for by Betterment. The newsroom was not involved in the creation of this content. Higher bond allocations in your portfolio decreases the percentage attributable to socially responsible ETFs. All investing involves risk, including risk of loss. Performance not guaranteed. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, unless stated otherwise.