What is ESG investing? Here's how to invest ethically : Life Kit Money talks, but how do you make sure your money is sending the right message? Ethical investing isn't magic, but it's one way to try and put your money where your morals are. Here's what you need to know before you get started.

Understanding the promises — and limits — of ethical investing

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LAUREN MIGAKI, HOST:

This is NPR's LIFE KIT. You might have heard before that money talks. Well, if you've come to this episode, you're probably wondering how to make sure that that money is speaking the right message. Maybe you want to put your dollars towards fighting climate change or fighting racism or inequity in the workplace. Ethical investing is one great way to start doing that.

MANISHA THAKOR: The broad idea behind this style of investing is a belief that you can generate meaningful, measurable societal outcomes while also generating a healthy profit.

MIGAKI: That is financial planner and consultant Manisha Thakor. She says ethical investing is a lot more complicated than just declaring your cause on your 401(k) paperwork.

THAKOR: Ethical investing is a lot like love. Everybody has sort of their own definition and take on it, and everyone feels they've landed on it at different points.

MIGAKI: Like love, investing requires us to figure out our moral priorities. Manisha Thakor has been thinking about this for a long time. She's worked in finance for more than 25 years. But her education started even earlier. As a child, her mother introduced her to media that taught her some key lessons.

THAKOR: My mom is a feminist, and she read me books like "Free To Be You And Me" and told me money gives women voices and choices.

MIGAKI: And her father introduced her to his HP 12C financial calculator.

THAKOR: And he showed me how to calculate, using reverse polish notation, if I saved and invested my babysitting and lawn mowing money from the age of 11 to age 65 and it generated, you know, market returns, how much money I would have. And when I saw those numbers, I was, like, hooked.

MIGAKI: So is it safe to say you've been investing since you were 11?

THAKOR: Yes, it is.

MIGAKI: That's amazing.

I was absolutely blowing my hard-earned babysitting money on candy at that age. So that's why, today, Manisha is going to be our guide to ethical investing. There's a lot of theoretical space to do good with your money. But the actual process of ethical investing can be a little thorny. I'm Lauren Migaki, and in this episode of LIFE KIT, ethical investing 101. We'll talk about what it is, how to think about it and help you find where to look to get started.

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MIGAKI: To begin, we need our ABCs of ethical investing - or our ESGs. If you've looked into this at all, you may have heard the term ESG investing. E is for environmental.

THAKOR: Generally speaking, environmental includes things like a company's use of energy, the way they deal with waste, pollution.

MIGAKI: S is for social...

THAKOR: Anything from gender, diversity and inclusion to does a company generate or donate a percent of profits to the local community or other causes?

MIGAKI: ...And G for governance.

THAKOR: Making sure the companies are avoiding conflicts of interests, not engaging in illegal practices and really being transparent in their accounting methods and the way in which they're interacting with shareholders.

MIGAKI: With our ESGs in mind, Thakor says start by understanding what cause you're fighting for.

THAKOR: Because no one ESG fund can address every one of the possible issues. So sometimes, people want a very clean investment, like the ETF SHE, S-H-E, where you are just focusing on issues around gender parity in the workplace. That's a very clean one. One that is a little more difficult to try and focus on would be clean energy. Is nuclear clean energy, or is nuclear not clean energy? And so you can take a topic that on the surface sounds so simple, but there are differing viewpoints. The way it looks in practice is that you really have to pull back the wrapper and see, what is the specific investment strategy if it's a separately managed account and an institutional manager running those funds?

MIGAKI: I like how you compared it to love because it's like there's a different partner for everyone, and those partners have different things that we look for, right? We all aren't looking for the same thing. And I think the same thing goes with ethics, right? We all have different bars. And so it sounds a little bit like you're saying if you're interested in getting into this, you should kind of pick the thing that you want to prioritize.

THAKOR: Yes. Although part of the problem is just because you pick what you want to prioritize doesn't necessarily mean you're going to get that. So if we want to continue on with our love analogy, let's take a dating app. And you swipe right, and the other person swipes right. And you have this image based on the profile. And then you meet in person. And sometimes, it can be a huge shock. And that's what happens. To give you an example, I've had individuals look at the holdings in a specific ESG fund and say, oh, my God, there's Exxon in here. I don't want Exxon Exxon in here. But it happened to be that, you know, Exxon was rating really well on its DEI policies. The fund came in on that element. And so the thing that I am most worried about - but also most excited about - when it comes to ESG investing is that we are in the early days. And enough people are interested in it that I think we're going to have some very creative solutions as compared to, what did this look like when I started in the industry 25 years ago?

MIGAKI: What did it look like?

THAKOR: So when I started in the industry 25 years ago, there really was only exclusionary-based emphasis on values-based investing. And it typically had to do with religious exclusions. So for a long time, the Catholic Church had a ban on owning any stocks in portfolios that involved its funds that dealt with abortion or birth control-related products and services. Then more broadly, other groups would start saying, I want no sin stocks - no alcohol, no tobacco. Then we went through kind of this dormant period, which I would say is most of the '90s up until early 2000s. What would happen is if you wanted ethical investing, typically, portfolio managers would say back to you, oh, that's ridiculous. Just make as much money as you possibly can, and make a difference with your charitable giving. I highlight this 'cause there's a lot of frustration on the part of people wanting to take part with ethical investments and not feeling like they're making a difference. And I just want people to understand things are definitely improving.

MIGAKI: And as you say, we're sort of at the beginning still a little.

THAKOR: Yeah. I definitely think we're at the very early stages. And the reason we're at the very early stages is there is no broad consensus on, first of all, what is an ethical stance in the environmental context, in the social context, in the governance context. On top of that - and perhaps even more importantly - there is no standardization as to how you measure and monitor that. So the period that we're going through right now is, like, trying to find our ethical investing love language. We're trying to figure out how to define very fuzzy concepts in a way that is measurable, transparent and consistent.

MIGAKI: Can there really be fully ethical investing? Does that exist?

THAKOR: It's - one of the ways I have been answering that question is to say that sometimes what we're trying to do is use a point to guide our actions and make sure each incremental next step is one that is beneficial and not detrimental to the goal at hand. But actually arriving at that point is - like at a point of nirvana is not something that's ever going to happen, you know? So we meditate, right? And we meditate, and we try and calm our thoughts. But we never get to a place where we totally can, you know, quiet down what the Buddhists would call our monkey mind.

And so it's the same thing with ethical investing, unfortunately, because one of the key inputs to ethical investing are humans, and us humans are flawed. And so it will never be perfect. But one of the things that I think the interest, the explosive interest we've had in ethical investing has done is link the word ethical to business.

MIGAKI: OK. So I hear you. Taking baby steps towards ethical nirvana is better than not trying at all.

THAKOR: Correct.

MIGAKI: You've sold me on that. I am a regular person who knows very little about investing. How do I get started? I find that the investment world can sometimes be kind of unapproachable and scary and kind of confusing. What do I do?

THAKOR: The shortest answer is to use a low-cost mutual fund, or ETF, that either focuses on a single issue that you believe in passionately or that has a broad, broad focus so you understand that you aren't going to be able to pick and choose each nuanced concept. But generally speaking, the investment vehicle is focused on companies that are trying to make sure that their next step forward is closer towards making the world a better place than a worse place. And to protect yourself, take a look at the investment fee. I like to see a fee of no higher than a half a percent on mutual funds and ETFs.

MIGAKI: Got you. Can we expect similar returns on an ESG-type fund? How financially sound is it to put all of our eggs in that basket?

THAKOR: I would say if you are using the broad approach in an indexed manner, you are diversifying your risk dramatically. But the issue of whether or not there is a return penalty to using ethical investing is hotly debated. And it's not an easy question to answer because there are now so many different types of ethical investments. So, you know, one way to think about it is, broadly speaking, you know, we're thinking, I'd like to retire at X age with Y amount of money. This is how much I'm saving a year. What kind of return do I need to generate in order to get there? And then you can see, did my ethical investments exceed or fall below that return?

MIGAKI: I feel like a lot of folks, their main investments come from their retirement portfolio. Are you seeing places where it's become more mainstream to choose to put your retirement in some of these places?

THAKOR: So I've seen a dramatic increase in a interest on the part of employees to have the option to engage in ethical investing in their 401(k), 403(b) workplace retirement plans. But the slate of investment options available in those plans is determined by the employer. And the employer has a fiduciary obligation to provide a slate of investments to their employees that meet a variety of criteria that basically boil down to it's good stuff. There's enough opacity that there has been concern on the part of employers about adding in these funds. As that changes - and there's a movement underfoot right now, and I would expect within the next couple of years that will change - then we're going to see an explosion of assets coming into ESG because the vast majority, as you say, of individual investors do their investing in their workplace retirement accounts.

MIGAKI: OK. So watch this space.

THAKOR: Exactly.

MIGAKI: How much impact can we possibly expect to have? Are we going to stop global warming, or is it sort of - should we pacify some of our expectations?

THAKOR: I think, you know, there are some people who say the whole idea of ethical investing is a farce. It's just something we've done to make ourselves feel better after we've ruined the planet. And I think there's some validity to that argument. And then there are other people who - and this is my personal feeling - who feel like, in a way, it's kind of a public shaming in terms of - it's hard to say I don't believe in the environment. I don't believe in being, you know, socially responsible or having good governance. And so I think the presence of this style of investing, what it's going to do is weave itself into the fabric of the way companies do business, the way employees - the way we act when we are at work and the ideas we come up with.

And so it's this virtuous cycle. As more and more people become interested in ethical investing, you now have more and more employees at companies, and it starts circling around. If you're in your 50s like me, I don't think we're going to see a dramatic, pinpointable action, but I think we're going to be able to feel really good that we were part of the generation that started pushing that boulder up the hill.

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MIGAKI: Manisha Thakor, thank you so much for taking the time to talk to us.

THAKOR: Lauren, thank you for having me.

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MIGAKI: For more LIFE KIT, check out our other episodes. We've got one on dealing with money avoidance, a few different episodes on budgeting and another on emotions and money. You can find those and lots more at npr.org/lifekit. And if you love LIFE KIT and want more, subscribe to our newsletter at npr.org/lifekitnewsletter. And as always, here's a completely random tip.

CAT KENNEDY: Hi. My name's Cat Kennedy (ph), and I have a new mom tip. I live in Homer, Alaska, with a short growing season, so I farmers marketed all of the nice, fresh vegetables, blend them down with bone broth and butter or coconut oil and then portioned them out into silicone ice cube trays to freeze them for future use as baby food - just got to defrost them. OK. Yep, bye.

MIGAKI: If you've got a random tip or an episode idea, please leave us a voicemail at 202-216-9823, or email us a voice memo at lifekit@npr.org.

This episode was produced by Andee Tagle. Meghan Keane is the managing producer. Beth Donovan is the senior editor. Our production team also includes Clare Marie Schneider, Janet Woojeong Lee, Sylvie Douglis and Audrey Nguyen. Beck Harlan is our digital and visuals editor. I'm Lauren Migaki. Thanks for listening.

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