What problem is your portfolio solving (or creating)?
Investing is ownership. Specifically, owning stocks, equity Exchange Traded Funds (ETFs), or equity mutual funds means that you stand to benefit as the underlying value of the businesses you invest in rises. It shouldn’t be difficult to understand this. However, many people tend to think of their investments as only a portfolio or an investment in the “market”. While it’s true that the near-term value of your portfolio can be determined by the rise and fall of the market, this does not eliminate your position as an owner.
If you owned a local small business, would you care what kind of business it is? Would you be comfortable owning a business that knowingly polluted the environment, took advantage of immigrants, or exploited children? Would you be proud to tell your friends and neighbors about how much profit your business made at the expense of…others. I would hope not.
Just because you own a much smaller exposure to businesses through the “stock market” does not make you any less of an owner. You still can profit when the business does well, either through stock appreciation or through a dividend payment. And if your ownership is through a fund or ETF, you still are an owner of each individual stock that comprises the fund or ETF.
One step you can take to increase your awareness is to check out investyourvalues.org, where you input your mutual funds or ETFs and receive an exposure report card. As an example, the S&P 500 ETF as created by the Vanguard 500 Index Fund (ticker symbol VOO) scores an “F” in fossil fuels given the number of investments in coal, oil, fossil gas energy & utility companies. I would suspect most people own an S&P 500 index fund like this. This fund also scores poorly for exposure to companies in the prison industrial complex, military weapons, and tobacco.
Now, I am not supporting investyourvalues.org’s methodology necessarily, but I do think it can be useful to see if you have some exposure to something you are passionate about.
Once your awareness increases about the kind of companies you own, there are several steps you can take. One step is to look for investments that are creating problems in the world and eliminate them from your portfolio. Very simple. This strategy is called negative screening and there is nothing wrong with it in theory but can be quite challenging in practice. How do you eliminate a stock or stocks from a broad holding like the S&P 500? Create your own portfolio without those exposures? Sell short the offending companies? This is unmanageable for most investors. You can seek out existing products that have negative screens but they may not conform to your precise values.
You can also look for investments that practice positive screening. Positive screening, as its name sounds, looks for companies that are operating businesses that may be helping make the world better. However, in practice, this can be quite challenging as well.
For example, the Fidelity US Sustainability Index Fund, which follows the MSCI USA ESG Index, is comprised of companies that score well (positive screen) on environmental, social, and governance factors. We would expect this fund to score very well. While it does score better, we see that this fund scores a “C” in fossil fuels, deforestation, and prison industrial complex exposures.
I believe that the positive screening approach is generally the correct one. Invest in companies that are going to make things better. Put your resources there. However, I don’t think most funds and ETFs are going far enough in this endeavor. They are likely to take funds or indexes that you already know and then skew those towards exposures that are mildly better. That is unlikely to produce real change.
Instead, one should look for companies that are trying to solve big problems. Every company began as a solution to a perceived problem. The question for investors is whether the problem being solved is worth solving (also can the company create an attractive business to solve it, but that’s a separate blog post). There are many companies that are solving problems like boredom (entertainment and social media companies) and inefficiency (a number of software companies). There is nothing wrong with these kinds of investments, but is anything fundamental really achieved by having a society that is more entertained and efficient? We are saving time by being more efficient so that we can be…more entertained? Again, there is nothing wrong with these companies, but don’t be surprised if nothing in the world changes from investing/supporting companies like these.
We are using the positive screen approach with the Flourish Fund to invest in companies that by their very mission are trying to add to human flourishing and strengthen communities. We believe that by investing in businesses that are trying to make people healthier, smarter, and more connected with one another (despite differences in socioeconomics or politics), then our world will benefit.
We believe that if the problem solved is big enough (e.g., extending healthy lives) and the solution is elegant enough, then there are big returns possible for investors…and a big impact on our world.
See our blog for other articles like this.
