Socially Responsible Investing Through Index Funds

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sri index fundsI’m in the process of trying to save up enough money to open a Roth IRA.  From everything I’ve learned, an index fund is the way to go.  I was all mentally prepared for everything when Done By Forty’s article threw me for a loop.  In it, he raises questions about supporting some of the most socially irresponsible companies and not even knowing it…because you’re investing in it through your index fund.

The large consensus from commenters was, “Oh, well, what can I do?  Sometimes evil wins, and I want to be invested in things that profit.”

That wasn’t good enough for me.  I want to make money as much as the next guy, but I’m not willing to sacrifice the sake of our planet and the welfare of my fellow human beings for extra wealth.  So I researched.  And it turns out there’s a whole field of investing dedicated to this exact issue.  It’s called Socially Responsible Investing (or SRI.)

They Have Index Funds!

If you search for an SRI index fund, you’ll find funds managed with social responsibility in mind.  I know what you’re all thinking:  does Vanguard have one?

Yes.  It’s the VFTSX and you can check it out here.  I can’t lie to you…it’s not performing as well as the S&P 500 right now.  (In this very moment of writing VFTSX sits at $18,445.26 while the S&P 500 is at $21,907.)  But it has a low expense ratio of 0.28%, and no front or back end loads.

“Oh!” you cry.  “I knew SRI couldn’t produce the same results I’m getting now!”

Hold on a minute.  Vanguard’s fund isn’t outperforming the S&P, but others most certainly are.  Take Parnassus (PARNX.)  They’ve been steadily outpacing the S&P since we started this slow crawl out of the Great Recession.  No loads, and the expense ratio is 0.86%.  Over the past 10 years it’s outperformed the S&P 500 by 1.85%.  It only has 45 holdings, but it’s record is  pretty solid.

Or look at TIAA-CREF’s Social Choice Equity (TICRX) which has a ten year record of +0.15 over the S&P, no loads and an expense ratio of 0.45%.

The point isn’t to tell you which funds to invest in.  Let me say that again:  this is not an article to reccomend which funds to invest in.  Markets are volatile and I only minimally know what I’m talking about.  The point is that it doesn’t really take that much research to find an index fund that could allocate your investments into companies that aren’t abusing human beings or killing the planet I want my children to grow up on.

But that’s ACTIVE investing.

Kind of.  Not really.  The way I see it, it’s the same as investing in any other index fund except you’re banking on the fact that the fund will not funnel money into inhuman work conditions or chemical “spills.”  If that’s active, sign me up.  But I’m not going to be picking my own stocks.  That’s the whole reason I want an index fund…I want someone smarter than I am to capture a snapshot of the market, and if they’re going to do it in a socially responsible way that will promote businesses that are, in fact, socially responsible, that’s the fund I want.  Especially since the performance issue seems to be a myth.

But therein lies the moral dilemma of investing in even SRI Index funds:  you are letting someone else make your moral decisions for you.  Unless you keep up on every investment in that fund, you don’t really know if they’re making decisions you’d agree with.  For example, VFTSX’s 4th largest holding is JPMorgan Chase, which is on the list of bad companies that orignally spurred Done By Forty’s post.  So without becoming an active investor, there’s really no way to be 100% sure you support where your money’s going.

But an SRI index fund is a hell of a lot better.  At least they are trying to implement some type of code.

I don’t care.  I’m not switching.

Fine.  I understand that.  But that doesn’t mean you can’t help make changes for better.  Take the investments you have now.  And try these things:

  • If you care at all about climate change, check out the CDP’s Climate Perfromance Leadership Index.  As a stockholder, voice your opinion that you’d like company disclosures and practices to be sufficient to get them into the top performing category (A-Band) on that list.
  • File a shareholder resolution.  You may have to have own $2,000 in company stock for 1 year+, but you can do that collectively.  So find some other people who care.  Know that you won’t win majority support, but generally if 20% of stockholders voice an opinion, the company pays attention.  I’d argue that this is more powerful than switching the type of index funds you buy.  It’s more work, but you’re actually working to change the “evil” part of the company into something good.  I’m guessing you’d feel pretty amazing after all that.  (All numbers in this paragraph can be found in USSIF’s “Investing to Curb Climate Change.”  I’d highly recommend the short read.  If you don’t care about the planet, but do want to improve work conditions of people in third world countries, or whatever your cause is, you can apply the same principles and process…just change the motivating factor.)
  • Tell the investment management company that you want to see more of a consciousness towards SRI in your index fund.  If you have a specific example, site it.  Enough people expressing their opinions can really produce a change.

 

Before I wrap this up, I want to mention Done By Forty’s article one more time.  It’s well-written and thought provoking.  It’s called Hotel Soaps and Externalities.

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32 thoughts on “Socially Responsible Investing Through Index Funds

  1. thebudgetsandthebees

    I’m a little embarrassed to admit that I’ve never really thought about what I’m investing in. I just pick a Vanguard fund and forget about it. I will look into their SRI fund – thanks for the information!

    Reply
    1. femmefrugality Post author

      All things being equal, their SRI fund isn’t the best out there. But if it eases the process, it’s definitely a good thing to do! It’s still got a trend that follows the market, albeit a small percentage below. But the initial investment is also smaller. So run the numbers..it may all even out.

      Reply
  2. Kalen

    Index funds! My favorite! I like that with all index and other mutual funds, if you do some research, you can choose the type of companies, like this. I have friends that only invest in certain companies based on their ideals and beliefs and I think it’s great that we have that option. I have heard of the SRI fund before. Great article! Loved it!

    Reply
    1. femmefrugality Post author

      That’s awesome! I think that’s so great of your friends. And I’m glad you liked it!

      Reply
  3. Meredith

    Would you believe that we actually do this? Yes, in all my financial-cluelessness we have explored social-financial investing and invest our money this way! Thanks for explaining a bit so I better understand what we are doing and I’ll finish up so you can take a minute to fall over in shock 😉

    Reply
  4. Alicia

    So a few weeks ago I had an afternoon long meeting with a few sustainability officers. They sat in on UN meetings back in the early 90’s when the concept all started ramping up, etc, and these people are environmentalists through and through, so I was a little shocked with the response I received when we talked about “dollars talking”.

    We were talking about big companies and how the big ones don’t actively show their sustainability programs. Some of the biggest companies out there make great strides towards it, but they don’t want to be crucified and latched on to, so they just keep it on the down-low.

    Now I will admit we were talking about a handful of examples, but some of the companies might not be quite so out of step with your beliefs – it just isn’t advertised. Though we were talking about sectors that many people do have problems with fundamentally (fossil fuel recovery, mining, extractive sectors, oil refining, etc)

    Reply
      1. Alicia

        You know, I can’t tell you that because I am a newbie on companies and how shareholder reports go, etc (I’m a scientist with very little business training).

        Reply
        1. femmefrugality Post author

          I am, too. I just know it’s where they told you to look in my research :p I’m so happy that some big companies are doing it even without disclosure though! Especially in a field like that where it is so desperately needed.

          Reply
  5. Mel

    Love this article! I actually do try to research the ethical side of companies I invest in (it’s part of why I don’t mind buying single company stocks vs. index funds)… I have a few stocks bought for me by my grandparents when I was growing up that I wouldn’t’ve picked on my own but all my current investments (outside of my IRA because, to be quite honest, I have no idea what that target date fund is investing in) don’t cause me any trouble sleeping at night.

    Reply
    1. femmefrugality Post author

      Hmmmm now I wonder if there are any target date funds that implement SRI. Good job on the individual investments!!!

      Reply
  6. evenstevenmoney

    I fall under the camp of Index and forget it for retirement. When I invest in individual stocks I choose items that I personally know about and in many cases use the product or service myself, that’s as close to socially responsibility as I will get with my investments. I will however cheer you on and hope you make the world a better place one investment at a time!

    Reply
    1. femmefrugality Post author

      Well that’s good for individual investments! I can hear the cheers! If you ever want to index and forget it with SRI, I promise the research isn’t too time consuming!

      Reply
  7. donebyforty

    You’re too nice to me in this article. I’m blushing a little.

    I have to admit that I’m confused about how SRI’s are “passive”, because a human being must be deciding whether a company is bad enough to be excluded, right? Still, with an expense ratio of 0.28%, it’s right in the neighborhood of index expenses. So if it walks like a duck, and quacks like a duck, and avoids the evil companies that breed and kill baby ducks for their baby-soft feathers…

    Reply
    1. femmefrugality Post author

      Haha EXACTLY. It’s not completely passive, you’re right. But there’s usually a metric used to judge if the company is eligible to be a part of that fund. A human is writing the metric and equating real life happenings that aren’t as precise as dollars and cents to that metric. But if that’s as close as I can get to passive I’m okay with that.

      Reply
  8. Liz

    I definitely would like to start being more sociably responsible when it comes to investing. Seems like money is the only way to get businesses to respond : ) Thanks for the information.

    Reply
    1. femmefrugality Post author

      Too true! Investing is like voting with your dollars in a way, and companies care about those votes.

      Reply
  9. jlcollinsnh

    Very nicely presented, FF.

    Personally, I am not a fan of SRI for many of the reasons you touched upon. Still, I respect those who are.

    I get this question on a semi-regular basis on my blog and I never quite know what to say. Now I can just link to this fine post! 😉

    Reply
    1. femmefrugality Post author

      I was hoping you’d stop by for this one! There are some caveats for sure, but for me it will be the right thing to do. My bleeding heart wouldn’t let me sleep at night. And that’s very kind that you’ll link to it! Thank you!

      Reply
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  11. The Frugal Exerciser

    I look at the prospectus occasion but I also need to examine companies my funds are investing in. I guess it is one thing to complain about certain companies but then invest in them and close your eyes because the fund is making you money.

    Reply
    1. femmefrugality

      Exactly. I want my eyes to be wide open. I knew a guy that was so against fracking, but still bought up land to sell to the oil companies making a killing. His response: “They’re going to buy that land off somebody. Might as well be me.” My response: gag. Say goodbye to your soul.

      Reply
  12. debt debs

    I’ve pinned this great post! Because it’s hard to follow easily what your invested in with index funds, it’s one reason why individual stock investing appeals more to me because you can pick and choose. However, if you find an SRI fund that matches your values, then it should be automatic and quite appealing.

    Reply
    1. femmefrugality

      Thanks so much, Deb! And you’re right…I think that initial research and finding one that aligns with your values could save a lot of worry and work later down the line.

      Reply
  13. Anne @ Money Propeller

    Interesting. I had no idea there were SRI index funds. Learn something new every day!
    I have some confuddled thoughts and opinions on SR investing, but they are not clearly articulated enough to put them in a comment.

    Reply
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