Are Green and Socially Responsible Mutual Funds Worth It?

In celebration of Earth Day, I want to share my perspective on green and socially responsible investing. The idea of socially conscious investing has been around for a long time, but its popularity soared over the last few years. According to Social Investment Forums: “Socially Responsible Investing (SRI) is a broad-based approach to investing that now encompasses an estimated $2.71 trillion out of $25.1 trillion in the U.S. investment marketplace today.”

earth-day

Photo by aussiegal via Flickr

However, I am not here to convince you that you should — or should not — invest in socially responsible mutual funds and ETFs. Actually, I am here to provoke your thoughts and offer you a different alternative.

Why Green and Socially Responsible Mutual Funds May Not Make Sense

Green and Socially Responsible is in the Eyes of the Beholder

For my first argument, I want to ask you a question: What do you consider environmentally and socially responsible? The problem with green and socially responsible investing is that there’s no standard and no regulation. Anyone can label their products green, and it’s not beyond savvy marketers to use that as a way to make money — just check out all the Greenwashing articles on The Good Human.

Second, the criteria for green and socially responsible are entirely up to the fund managers and companies. There are varying degree of greenness and socially responsibility. Are your investments, or the ones you’re considering, environmentally or socially responsible enough?

Third, even the greenest and most socially responsible companies can have dirty partners. This is the day of world economy and interconnectedness. Are you sure that your green companies do not have dirty dance partners? Using the six degree of separation logic, it is probably that your green companies are working — either intentionally or unwittingly — with one or more dirty companies.

Green and Socially Responsible Investing Does Not Have Enough “Oomph”

Unless you’re Warren Buffett, you have very little influence on the actions of any company — whether you’re investing in it or not. And even at the stated 10% of investments that are considered socially responsible under Social Investment Forums’ definition, it’s still just a drop in the bucket in my opinion.

Instead of investing or not investing, you can impact a company in a much more meaningful way by purchasing or not purchasing its products and/or services.

Green and Socially Responsible Investments Are Expensive

According to Kiplinger’s article Five Great Green Funds:

Over the past ten years, the average socially screened stock fund has returned an average of about one percentage point per year less than the typical stock fund.

Moreover,

The average socially conscious stock fund charges 0.16 percentage point per year more than the average stock fund.

That’s a big price to pay — huge if you compound it over 30 years. Worse yet, you’re not paying directly to support any kind of environmental or social initiatives. Instead you’re paying for mediocrity, the operating costs and the profit margin of these funds.

A Better Way to Be Green and Socially Responsible

I don’t want you to start think that I am against these good causes. So I want to end this article with how you can be more effective in both investing and supporting environmental and social well-being.

Here’s a simple idea. Go buy yourself inexpensive passively managed mutual funds, instead of these green and socially responsible funds. Now take the difference, which is on average 1.2% of your investment portfolio, and donate it to your favorite charities and organizations. I bet that this makes a bigger difference than trying to go green with your investments. For example, if you have a $100,000 portfolio, that’s $1,200 per year! If you don’t think this is better, go ask your charities and see which one they’d prefer: (1) that you invest in green and socially responsible investments, or (2) that you donate 1.2% of your portfolio annually to them. Hmm…

Here’s another green idea, please visit the Earth Day Network site, take action, and make Every Day Earth Day.

About the Author

By , on Apr 21, 2009
Pinyo
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo have enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

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Leave Your Comment (10 Comments)

  1. James says:

    Honestly, a lot of this emphasis on “sustainability” seems quasi-religious, almost like people want to worship the environment and are willing to sub-optimal financial decisions based on that belief.

    Its akin to buying indulgences in renaissance Europe, its a financial decision which has no rational basis, it only makes sense when you factor in the religious dimension.

  2. For me, green and SRI mutual funds are a waste. Many great companies have already made substantial movement in green practices. Stick to the ones that are comfortable to you because you are never going to fully agree on what your fund manager believes are green or socially responsible.

    Personally I would like to advocate more local investing as a SRI technique. This would include local banks, small business loans, community housing projects, local stores, etc. These are the types of investments that you can actually influence and see pay off before you. You have more incentive to see them succeed. The social capital that they provide you will pay off dividends to come.

  3. Jim says:

    It’s about time people looked to Green Mutual Funds for responsible investing for our children’s childrens sake.

  4. Pinyo says:

    @SJ – Agreed. That’s one of the point I made above. Also, thank you for using the word “elegant” — no one ever said that about my idea before. :-)

    @Banker – I agree about the principal part, and for some, that’s reason enough to invest strictly in green and socially responsible funds.

    @Miranda – Thank you for sharing the list.

    @Curt – I assume you’re answering whether or not green investments are worth it…

    @Mel – Thank you. I agree and understand.

  5. Mel says:

    Interesting post – my firm matches investors to financial advisors (ClaroConnect.com ) and the fastest growing trend we have seen over the past year is for investors searching for socially responsible investment advisors. Your idea on saving investment fees and donating the difference makes sense, however, many socially responsible investors are passionate about a specific topic like avoiding companies in Darfur, and are going to do everything they can, including working with an investment advisor who can screen for this.

  6. Curt says:

    No. Not a chance. The government is planning to force everyone to use Green Energy even thought it costs much more and then they are planning to add tax on top.

    Otherwise known as Obama energy plan and Cap & Trade tax.

  7. Jessica N. says:

    Green Star Alternative Energy is a demand driven, eco-energy company that concentrates its efforts on changing the way energy is produced. A bright future is dependant upon the appropriate actions of today – and Green Star is developing projects world wide to meet the global need for clean, environmentally friendly methods of energy creation. (GSAE.PK)

  8. Miranda says:

    Another thing I like to do is look at a list of the sustainable business 20 (2008 list here: http://www.csrwire.com/press_r.....ble-Stocks ) and then use some of my “play” money to invest in one or two companies that seem fundamentally sound to me.

  9. Baker says:

    You bring up a very interesting point about investing for better returns and then using that money to make a difference. For most people that would go to the trouble of specifically investing green, though, the principle would be what kept them investing in such a way.

  10. SJ says:

    Great post!

    Question, isn’t it easier to “vote with your dollar” as a customer? or at least on that scale.
    But the part of donating the extra money you save is elegant =)

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