Are Green And Socially Responsible Mutual Funds Worth It?

By Pinyo, on April 21, 2009

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.”

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 thought 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.

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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