The problem with ESG funds—and how to make a ‘real impact’ with your money: Financial expert

There are many ways for everyday investors to make a real impact on issues like climate change, gun violence, and racial and economic justice.

As a partner at Values Added Financial, which manages $150 million of investable wealth for about 80 households, I advise people on how to use their money to do right by their community, while still meeting their long-term goals. 

You might have heard of Environmental, Social and Governance (ESG) funds, which are designed to remove companies that create harmful products and services from your stock portfolio. Maybe you’ve already invested in them. In 2022, one in every eight U.S. investor dollars was in an ESG fund.

Unfortunately, they aren’t always the most effective way to make an impact with your investments. 

Many people don’t love the idea of financially benefiting from companies whose goals, policies, or methods they strongly disagree with. But boycotting a company’s stocks doesn’t work the same way as boycotting its products. 

When a consumer boycott costs companies revenue, it gives the company a strong profit incentive to pivot. People often assume the same logic should apply to the stock market: if fewer investors want to buy shares of a company, shouldn’t it cause the stock price to go down? 

But as long as profits aren’t hurt, someone else will buy the shares, and the share price won’t go down much, if at all. So ESG funds don’t create the same motivation as boycotts for businesses to change. 

If you want to make a bigger impact with your portfolio, here’s what you can do:

1. Be a shareholder activist.

Investors can vote the shares of the companies they own in a way that fits their values. 

In 2020, for example, impact investors with an ownership stake in ExxonMobil managed to move the company away from denying climate change and toward investing in green energy.

And Coalition for Immokalee Workers successfully used shareholder activism as part of their campaign to get Wendy’s to be more transparent about labor violations.

2. Create your own personalized index.

With a personalized indexing approach, you create your own index of companies and own the shares of each yourself, instead of buying a pre-packaged mutual fund or ETF.

This allows you to cut out any companies or industries you don’t like without having to search for an existing cookie-cutter ETF that shares your exact priorities.

Setting up your own portfolio of individual stocks used to be very hard and expensive to do when every trade cost you something.

But automation, lower or free commissions, and firms specializing in helping people execute this style of investing are making it more accessible.

3. Lend money to social impact initiatives.

You can lend money through nonprofits, community development financial institutions (CDFIs), and community banks.

While it’s difficult to find and vet these opportunities, there are many resources. A non-profit owned investment firm called Calvert Impact Capital regularly releases “community investment notes.”

When you buy a note, they lend the money to dozens of organizations they’ve vetted to fund more affordable housing, solar and wind energy, worker cooperatives, and even for-profit businesses with social benefits. 

Ari Weisbard is a manager partner and financial advisor at Values Added Financial, a registered investment advisor that serves clients who want to invest, donate, and spend their money in ways that align with their values.

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