As the country endures an ongoing pandemic and social unrest following the murder of George Floyd, tragedy has at least offered the positive byproduct of pushing both social and environmental issues into the national conversation. And arguably more so than at any point in recent history, people feel outright obligated to convert that conversation into active engagement and change, made most evident by the massive protests across the country.
But while enduring pressure for change from collective voices can succeed, money—for better and worse—often talks loudest. Fortunately, many inclined to make real change have recognized this reality, finding ways to align money with what they feel matters most. Historically, this has most often come in the form of charitable donations—getting dollars directly to organizations on the ground addressing problems. And so far this year, charitable donations have hit records, totaling nearly $12 billion toward COVID-19 relief.
As billions in donations clearly can do specific good for particular causes, people tend to overlook the trillions of dollars in capital markets—the money invested in corporations—that either enable or deter every aspect of corporate behavior and therefore the ripple effects of that behavior across our society. By investing money in a way that aligns with values, investors can empower the companies that perform well when it comes to environmental, social and governance (ESG) issues while cutting the figurative fuel line to the companies that don’t.
With critical issues in the headlines and a growing awareness of ESG investment approaches—and growing evidence these approaches don’t hurt performance and in fact can limit portfolio risk exposure—investors have begun to more often recognize and wield the influence of their invested dollars. In fact, even during the worst market correction in more than a decade, U.S. ESG investment funds posted record inflows of $20.9 billion for the first half of 2020, already nearly matching the full-year 2019 total of $21.4 billion.
Still, awareness of the availability and effectiveness of values-based investing in general has a long way to go. As protesters take to the streets to topple systems that, in their view, have supported socially unjust practices, many of them unknowingly continue to financially empower those very systems by way of their investment accounts. Private (but publicly traded) prison companies, for example, rely financially on putting and keeping people in prison. It’s clearly counter-intuitive to protest social injustice or donate to criminal justice reformers while you’re financially supporting the private prison industry in your 401k. And yet millions of people across the country unknowingly carry out some form of this unfortunate irony every day and with every invested dollar.
Companies can continue business operations that many believe do damage to society partially thanks to the billions of dollars that average investors funnel through some of the most common exchange-traded funds (ETFs) and mutual funds, as each single fund often consists of hundreds of individual company stock holdings. Passive index investing (often via ETFs) exploded in popularity over the last few decades as a way for millions of investors to cost-effectively create broad, diversified exposure to the stock market—a stock market that unfortunately happens to include many companies that score incredibly poorly when it comes to financially material ESG issues.
Meanwhile, change-makers who recognize an opportunity to turn words into impact through their investment portfolios still face an increasingly confusing product market to accomplish that goal. In step with the increasing popularity of ESG and impact investing, financial services firms have shown increasing efforts to market investment products with sustainable labels, in many cases misrepresenting the underlying products themselves. While some firms may have taken to this “greenwashing” of labels simply for the sake of capturing the dollars of naïve investors, others have arguably unintentionally misled those investors despite genuine efforts to deliver better solutions.
One social justice-minded financial services firm, for example, bills itself as a platform focused on educating first-time investors—and in particular female investors—offering “impact” portfolios. And while the “impact” label implied the portfolio might include companies with specific “beyond the bottom line” missions to better the world, it instead included several broad index funds, like the Vanguard Total Stock Market ETF, which consist of—among dozens of other poor ESG performers—private prison companies. The firm has recently addressed this issue, vowing to rethink their investment approach.
As the pandemic, social justice and now an upcoming presidential election continue to command the headlines, many people will continue to seek effective engagement for making positive change. Now more than ever, those change-makers can use dollars beyond traditional approaches like philanthropy to more fully align wealth with values. As those advocates recognize the role of invested capital, collective dollars can convert words into impact by influencing corporate behavior, which in turn could lead the country toward a safer, more sustainable and more just society.