By Gale A. Kirking, CFA
Lots of people are eager these days to invest responsibly or sustainably. In many cases, though, they become frustrated, even disillusioned, as they begin to realize how difficult it may appear to be to make investments that align with their personal values. I understand that exasperation, but I do not share the feeling. That’s because I have been investing responsibly since 2016 and, to my satisfaction, it has so far worked out pretty well.
So, I can tell you that responsible investing is not impossible, but it can be challenging and time-consuming. It generally requires considerable initiative, effort, and learning on the investor’s part, because the people and institutions one would expect to assist in this undertaking may not in fact be all that helpful.
Financial services are not responsible investor friendly
In my opinion, the single most important reason why “responsible,” “sustainability,” or “ESG” (i.e., “environmental, social, and governance”) investing can be so difficult is that the financial services industry is not set up to facilitate truly responsible investment for individuals. In my observation, that business is neither incentivized nor organized to support responsible investing (an umbrella term I will use here for the various flavors of do-good investment). Nor does the regulatory framework supervising the financial services sector facilitate responsible investing. Meanwhile, the issuers of investable instruments (mainly companies selling their stocks and bonds) are in many cases exerting greater effort to present themselves as “green” and “responsible” and “sustainable” than they are in working actually to be more green, responsible, and sustainable. Finally, the investment industry generally has turned ESG and sustainability into a display of marketing gimmickry, as it generally does with any new trends and bright ideas in investing as they come along.
I think then that the second most important reason why responsible investing can be so daunting is that do-good investors (and my use of the term “do-good” here is not at all intended to disparage those investors, particularly inasmuch as I, too, am such a do-gooder) often cannot themselves describe unambiguously what they do and do not want their investments to be.
I will be discussing all of the above and much more in a series of essays that I am beginning here. I will be spelling out the unvarnished truth about responsible investing for individuals, as I see it, while providing what I hope will be useful insight on how an individual can actually get started in putting money to work in good conscience.
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So, who is this guy to talk?
Before I lead you any deeper into all of this, let me introduce myself. Then you can decide whether you want to read further or not.
I have been a Chartered Financial Analyst (CFA) since 1998 and have earned the CFA Institute’s Certificate in ESG Investing. These are well-regarded professional credentials in the investment and sustainable investing fields. I formerly was a director of equities research for an international bank based in Austria. I have been running a small, socially responsible investment partnership for close friends and family since 2016.
That said, let me make very clear that I am not a licensed or registered financial adviser in any jurisdiction. I do not have clients who pay me to provide them financial advice. I make my living these days primarily in specialty corporate communications, not investment advisory or management, although a large proportion of my communications business has historically been in the financial services sector.
I am not writing this to provide specific investment advice targeted or tailored to the needs of any individual investor. You should consume – or choose not to consume – the ideas and information presented here with an appropriate level of caution and skepticism.
One could describe me as a responsible investing purist. There are things that I do not want to invest in and therefore I do not invest in them, period. Some people might regard that as imprudent or eccentric. Finally, please keep in mind that the opinions expressed herein are just that, my opinions. Other equally or more knowledgeable people will have different views.
In future posts within this space, I will
- discuss inherent inadequacies of the investments industry and its products and services offerings and how to deal with these,
- present criteria and a decision framework to help would-be responsible investors figure out what they really do and do not want and how to pursue it,
- suggest some possible approaches to responsible investing,
- explain how to design and build a responsible investment portfolio, and
- offer a primer on how to pick investment instruments for inclusion into your own responsible portfolio.
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For today, I want to begin by addressing a common misconception that keeps some investors from even trying to put their money where their consciences are.
The whole market myth
Individual investors commonly are told by their financial advisors and by media-savvy investment experts that they simply must buy the whole stock market. Doing so is to place a bet on the historically strong and resilient U.S. economy and limits risk through broad diversification. For a U.S. investor, the whole market typically is represented to be the S&P 500 Index, consisting of roughly 500 of the largest companies listed on stock exchanges in the United States. It encompasses around 80% of the overall U.S. stock market as measured by total market capitalization.
The entire U.S. stock market, however, actually consists of more than 7,000 stocks. That means, roughly speaking, that there are 7,000 – 500 = 6,500 small-capitalization and medium-capitalization companies whose shares are also available for purchase. Moreover, if one looks across the globe, there are greater than 50,000 companies the stocks of which an investor might theoretically choose from.
So, the S&P 500 is not the whole market. Just for simplification’s sake, though, let’s say that it does represent the entire stock market. Moreover, it is easy to invest into by means of a low-cost S&P 500 Index fund (or any similar large-cap index fund) and, historically, it has generated excellent investment returns. For the 10 years from 31 December 2014 through 31 December 2024, the S&P 500 generated annualized returns of just over 13%. That calculation is inclusive of dividends but is before subtracting fees of any kind (and, of course, in the financial services industry there are, in fact, fees of many kinds).
Viewed purely from the perspective of financial returns, buying the S&P 500 is a pretty good bet. So, is it true that investors must buy the S&P 500? No, it is not. In my opinion, investors need not buy anything into which they do not want to invest. On an individual basis, this comes down in large measure to a question of what they care about and don’t care about.
The index is agnostic
Let’s imagine a modestly moralistic person who would not consciously go searching to invest into companies involved in producing or selling tobacco products, sugary drinks, gambling, assault rifles, fracking, fast fashion, or pornography. If the stock of a company focused in any of these business areas were to be offered to our investor, he or she would surely say no thanks. That same investor, however, might nevertheless be convinced to buy shares in an S&P 500 Index fund, even though all of these disreputable or morally questionable industries are well represented in the index, as are many others that various responsible investors would like to avoid.
As industrial dumpers used to contend about their toxic wastes, the solution to pollution seems to be dilution.
But let us not be unfair. The S&P 500 is what I call socially and environmentally agnostic and its creators do not pretend otherwise. It doesn’t make any value judgments. If a company is big and has plenty of so-called “free-floating” shares to buy and sell in order to create a liquid market in those securities, then into the index it goes. No claim to the contrary, no hypocrisy.
Nevertheless, I would like to ask, if an investor would not individually buy the stocks of several dozen or more companies that are included within the S&P 500 or any other index, then why should he or she find the idea of holding these stocks any more acceptable when diluted by the stocks of many other companies? I, for one, do not. Responsible investing is about picking out the acceptable from the unacceptable. There are various approaches to achieving this, and I will be discussing these in future installments of this series. Some of these methodologies might be regarded as quite good, others less so.
To be true to one’s conscience when investing, the responsible investor needs to have a reasonable understanding of what he or she is buying and owning. This is true whether these holdings be collective investment products (like mutual funds) or the shares of individual companies, and I’ll be discussing all this in greater detail in future essays.
Second biggest problem: the investors themselves
As I stated earlier, another important reason why responsible investing can be so hard is that would-be responsible investors usually don’t know what they really want and even much less about how they might go about achieving that. Before you can decide which investments are and are not responsible, you need to decide in your own mind what products and services, business practices, and corporate behaviors you personally regard as being acceptable and not acceptable. Responsible investing is not homogeneous. Indeed, its varieties are boundless. Investing to do good is rather democratic by nature: each investor votes with his or her own money
Your view of responsible investing might very well be different from my view on that subject and at odds also from the next person’s perspective. In fact, my guess is that even many husbands and wives will not wholly agree on this matter. How then, can we expect individual financial advisers and the investment industry as a whole to offer investment services and products broadly conforming to diverse beliefs and preferences? Presumably, an investment adviser is neither a mind reader nor a marriage counselor.
In a future article within this series, I will focus in on defining one’s own views regarding what is and is not responsible and converting that information into investment preferences. Meanwhile, let’s just look at one example of a potential investment to illustrate the basic quandary.
Starbucks – socially responsible or public menace?
I’ll take Starbucks as a simple example. About the time Starbucks went public in 1992, selling its shares on the NASDAQ market and stepping up its global expansion, the company was regarded as a hip, socially responsible stock to own. After all, Starbucks aimed to source its coffee in an equitable manner while not unduly exploiting coffee farmers, their families, and communities. Starbucks’s cups were recyclable or compostable. This all sounds pretty good. Later, they even added free Wi-Fi.
But when I look at Starbucks, I see a company the very essence of whose business model is to push onto preteens, teenagers, and adults inherently unhealthy and habit-forming drinks powered by large doses of an addictive stimulant (caffeine), sugar, and fat. I also see a company that is one of the world’s largest purveyors of single-use plastic cups, the vast majority of which do not get recycled and certainly thousands, probably millions, of which end up in the ocean, along with billions of Coke bottles, cigarette butts, drinking straws, and other single-use plastic items.
From my point of view – and you may see this very differently – Starbucks is fundamentally a socially irresponsible company. I don’t buy its coffee, and I would never own a share of its stock.
Starbucks is popular among the holdings of ESG, sustainable, and responsible mutual funds both large and small. The Motley Fool investment organization has in the past rated Starbucks an outstanding 10 out of 10 within its ESG Framework. As of this writing, CSRHUB, an aggregator of ESG ratings gives Starbucks 81 points out of 100, which is regarded as a high score. Sustainanalytics ranks the company “Medium” in its ESG Risk Ratings. On the other hand, in 2023, EARTH.ORG ranked Starbucks 9th on its list of the 13 major companies responsible for deforestation.
So, is Starbucks a responsible company or not? Well, there exists a wide range of views. What matters to me as an individual investor striving to support sustainable, upstanding companies is my own view, which I believe to be well-informed and rationally formulated. I encourage all responsible investors likewise to assemble and adhere to views that are well-informed and rationally formulated.
Responsibility is in the eye of the beholder
A point upon which I will be elaborating in a future essay of this series is that responsibility is in the eyes and mind of the attentive beholder. Deciding this is necessarily a somewhat subjective exercise. There are numerous ESG and sustainability ratings agencies and organizations. Some have better methodologies than others. Some are more – or less – honest and unbiased than others. And every publicly traded company that cares about its ESG and sustainability ratings is doing what it can to influence those ratings to its own advantage.
“Greenwashing” is a term we use to describe companies’ attempts to make themselves and their products and services appear more environmentally friendly than they really are, and some are really good at it. For many companies, moreover, their ESG and responsibility commitments are only skin deep. This was made very clear with the recent change of administrations in Washington, as CEOs at major U.S. banks, retailers, restaurant franchisers, technology companies and others were very quick to back away from the very responsibility commitments they had been crowing about from the rooftops just weeks earlier.
I hope you will stay with me as discuss all these and other aspects of responsible investing throughout this series. I also encourage you to contribute your own experiences and questions in the comments to our Channel BlueGreen, at one of our associated social media channels (Facebook, LinkedIn), or by following me at Substack. Please, let’s keep our comments polite.
About the author: Gale A. Kirking is a Chartered Financial Analyst (CFA) and has earned the CFA Institute’s Certificate in ESG Investing. He formerly was employed as a senior equities analyst and director of investment research and has worked in and around the financial services sector for about 30 years. Kirking is not a licensed or registered financial adviser in any jurisdiction and does not make his living by providing financial advice. This essay and series are not intended to provide specific investment advice targeted or tailored to the needs of any individual investor. The views expressed herein are the opinions of the author. Other equally or more knowledgeable people will have different views.