So…are you perhaps interested in investing but want to do right by the world? How do we weigh the obvious benefits of investing against the hypocritical feeling that we are funding the dark side of the capitalist system? Many choose a path of sustainable investing, choosing to forego certain companies or industries from their portfolio altogether. But are we accomplishing anything with this approach?
Today we take a wide-ranging view on the ethics of investing, the fundamentals of consumerism, human behavior, and the efficiency of economies to adapt to changes in consumer sentiment. In doing so, we examine five key considerations with sustainable investing.
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A couple of years ago I wrote this questionable rant after being told that financial independence was only possible for me because of my high-paying career in “dirty oil extraction.” (Hi, I used to be a geologist in the oil and gas industry.)
I’ve received a number of emails or comments over the three years of running this platform that contain a similar theme. To paraphrase, these discussions go something like this:
I want to invest, but I feel like a hypocrite supporting X, Y, or Z industries. * What can I do?!
*Generally fossil fuel producers, gun manufacturers, or other socially, politically, or environmentally contentious industries.
Our investing philosophy is simple, but we still care.
Our investing philosophy is very simple: we want a piece of the entire pie. We don’t filter out any companies or industries, opting instead for a simple representation of the entire stock market, which we get through our beloved stock index fund, VTSAX.
The CC Family Investing Strategy, Part 1: Philosophy and Asset Allocation
The CC Family Investing Strategy, Part 2: Where Exactly Is Our Money?
Does our full-pie approach make us calloused, uncaring, and profit-at-all-costs enthusiasts? Absolutely not! I’m not here to outline my values or political beliefs in a neat bulleted list, but I certainly have strong opinions about the pros and cons of the capitalist system. I will say this, which may strike some as an oxymoron of sorts: As a former oil and gas geologist, I am very pro-environment. Here’s why:
Does our full-pie approach make us calloused, uncaring, and profit-at-all-costs enthusiasts?
Sustainable Investing Consideration #1: Who Is Really to Blame?
The concept of sustainable investing inherently suggests that a product, company, or industry is the root of a problem in society or the environment. Going the next step further then, it would seem that removing financial support from said product, company, or industry would fix the problem. But is that actually true?
Are producers of socially questionable products to blame, or do we—the consumers of said products—shoulder the bulk of the burden? At the end of the day, it’s economics, not morality, that drives mass consumption.
An affordable and widely available choice will always win over morality. Acting on morality demands some combination of the following:
- Paying higher prices
- Making harder choices
- Or both of the above
Humans Value Now Over Later
Humans intrinsically value now over later. We have a present bias that undermines our ability to save money, to lessen the effects of climate change, or to look beyond the next fiscal quarter. Precious few individuals regularly act today to make their own future lives—and much less those around them—better.
Let’s take a look at fossil fuel use, which is a topic near and dear to my heart. Again, the use and production of fossil fuels is not something I defend with red-blooded enthusiasm. And that’s coming from someone whose paychecks were cut from oil and gas producers for a decade.
But I’m also not so naïve as to think we can hope our way out of our reliance on these highly efficient sources of energy. First, consider reading this well-done article from the Brookings Institute. This article makes the convincing case that human-induced climate change is real, how the history of the 20th century is the history of fossil fuel use, and why it’s going to be so damn hard to rid ourselves of these energy sources.
In a weird way, all of us—and none of us—are to blame.
Sustainable Investing Consideration #2: Economics Drive Consumption, Not Morals
Cars proliferated in America during times of low gas prices. Don’t believe it? Check out the helpful diagram below of absolute and inflation-adjusted gas prices from 1929-2015. Car production ramped up from 1951 to 1973, coincident with the lowest gas prices (US car sales from 1951 to 2020 is here).
TitleMax.com
Cheap and efficient fuel incentivized our deep reliance on the automobile, airplane, and the myriad other fossil fuel-driven technologies that are woven into modern society. Oil and gas became the blood of the industrialized world. Without a doubt, fossil fuels improved quality of life for almost anyone, but not without cost. What goes up must come down.
If we hope to make changes in an industry, sector, or product, the strongest weapon is price. When a product is cheap (and useful), we exploit that product with scant regard for unintended consequences. Once a product becomes prohibitively expensive, human behavior changes. Conversely, if the unintended consequences affect us in tangible ways, human behavior changes. Then, and perhaps only then, do we favor a new path of least resistance.
Make It Harder
Do we want less consumption of fossil fuels? Well, like with any habit we want to break, we have to make it harder to participate. As gas prices rise, we feel the pinch, and we spend our dollars accordingly.
A study using data from 2012-2014 found that gas prices are correlated to trends in vehicle sales. The most convincing correlation was found between low gas mileage vehicles (17 mpg and below) and rising gas prices. As gas prices rise, sales of low gas mileage vehicles fall, and vice versa.
Notice that gasoline prices in America are some of the lowest of any developed nation. Do you think gas is expensive now? Prices are more than twice as high in most of Europe.
If we want meaningful change in fossil fuel use, trying to punish the producers is largely futile. And choosing “to do the right thing” is both difficult to define and even harder to implement. We have to disincentivize demand.
Here’s the CC Prediction: Expect increasing fuel taxes and efficiency incentives in the future. Unfortunately, however, I’m not sure we can expect to see the necessary political action until the effects of our inaction are too visible to ignore. If fuel is prohibitively expensive, folks will use less of it. If fuel-efficient means of transportation are highly incentivized, in tandem with higher fuel costs, folks will be offered fewer and fewer high-polluting alternatives. In short, expect higher taxes. Again, like most people, politicians are exceptionally bad at producing policies designed for uncertain long-term outcomes beyond the next election cycle. And that’s just the United States; China, India, and many other developed nations must come to the table as well.
Sustainable Investing Consideration # 3: Investing Gives Power
Being a shareholder provides voting power, even if most don’t exercise that power. Certainly, a tiny piece in Walmart from a $3,000 investment in an index fund won’t land you a spot on the Board. That said, I would argue that your holding power is a stronger incentive to change than choosing to divest from these companies or industries.
Here is a powerful example of recent shareholder activism against Exxon. These investors believe that social investing, not divesting, can generate out-sized returns on movements for change. And in this David-versus-Goliath story, it worked.
Sustainable Investing Consideration #4: Divesting Isn’t Effective
We do not find divesting to be particularly effective because individual investors carry little weight compared to major private equity and other large corporate financial backers that form what’s known as institutional investors. In fact, institutional investors account for more than 85%-90% of trades on the New York Stock Exchange.
The rest of us—what’s known as retail investors—only throw around a 10-15% punch. Pulling out on shares of Exxon—and even convincing millions of your closest friends to do the same—is like trying to kill a rhino with a kamikaze paper airplane. Even with the strongest morality, institutional investors will still supply the vast majority of the funding, provided these companies continue to supply a return on investment.
I have to admit, the line between retail and institutional investors is a bit blurry. Do index funds, which are managed, fall under retail or institutional investing? Either way, the big guys on Wall Street throw around the most weight.
As discussed in this 2015 piece by the New Yorker, divestment is not effective at negatively impacting share price. When shares are divested, other investors will simply step in to gobble the bargain, negating any detrimental impact to the company. Finally, as we discussed above, the article mentions that the best outcome of a divestment campaign is to simply introduce stigma and change consumer sentiment, lowering demand for the product being sold.
But how does stigma force change in companies?
Sustainable Investing Consideration #5: Trends Change
If consumer sentiment changes, whether it be forced or otherwise, companies will shift. We saw McDonald’s add salads. Ford just built an electric F-150. And BP in 2001 rebranded as “Beyond Petroleum*.”
The common denominator is that all these companies see a cultural shift, which in turn affects consumerism. If companies want to survive, they have to evolve. Sometimes dramatically.
If companies don’t evolve, they die.
Who knows? Will BP slowly divest from oil and gas to one day be the largest solar energy producer? If so, you might be happy you held on to that stock.
*BP was really proud of this when I interviewed for an internship over a decade ago (worst interview process ever, by the way). Of course, they blew it in the Gulf in 2010, eventually sold off their assets in wind and solar, and quietly abandoned the rebranding.
I Still Can’t Do It: I Want Sustainable Investing
Despite what’s written above, many will still not be able to handle investing in companies that challenge their beliefs or values. I get that, you do you. I’d rather have you investing somewhere and somehow as opposed to sitting on the sidelines with cash under your mattress.
Consider ESG investing, which stands for Environmental, Social, and Governance investing. However, the definition of “sustainable” becomes highly subjective.
I’ll be honest here: for all the reasons mentioned above, I’ve never spent much time looking into ESG investing. As such, I have no personal accounts of preferred funds or investment methods within the bounds of ESG investments.
That said, ESG-defined “sustainable funds” have exhibited high returns and perhaps even lower risk than traditional funds in recent years. Granted, many of these trends are highly swayed by recency bias, with data barely covering the last twenty years.
It makes me wonder: are today’s social, cultural, and political norms—and thereby definitions of “sustainable”—here to stay over a long investing timeline of 40+ years? Are today’s corporate darlings tomorrow’s evil overlord? I’m not so sure. Hell, daily bathing is still a new thing for humanity!
…Are today’s social, cultural, and political norms–and thereby definitions of “sustainable”–here to stay over a long investing timeline…?
Sustainable Investing Summary
In the end, we choose to let markets take care of themselves, meanwhile living in a way that reflects our values.
As the cultural, political, and environmental zeitgeist changes, companies come and go, and the global economy pivots and evolves. Where one company or industry struggles to evolve and survive, a new company or industry is born.
By owning a broad-based and diversified index fund, we don’t have to worry about being in the right place at the right time. We simply choose to put faith in the economy as a whole. And in the end, I have to believe the global economy is truly the only sustainable force.
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You nailed this topic on the head, Mr. CC.
Personally, I view investing in the broad based index as more appropriate. If you disagree with certain companies and societal behaviors, donating monies to causes that combat/mitigate/or educate people on them is sure to be a much more impactful form of activism. But as always, people will do what brings them the most contentment and rational thought is in the eye of the beholder.
Thanks for this! I really like the idea of putting money toward causes that combat/mitigate/educate against the cause of concern. Great point.
I listened to the podcast. I thought you did a great job.
Solid! I appreciate that feedback.
I just saw this in my RSS feed. I don’t have the attention span to read it, but this guy knows his stuff: http://aswathdamodaran.blogspot.com/2021/09/the-esg-movement-goodness-gravy-train.html
Thanks for sharing…I dig it.