How to Reduce Your Carbon Footprint Through ESG Investing

I live in the Inland Northwest and I saw this post on Twitter a few days ago. As I looked at this tweet I laughed and cried at the same time. Not only can you not see Mt. Rainier, you cannot even see downtown Seattle from the Space Needle because of all the wildfire smoke. I lived in Seattle for five years off and on from 2007 – 2015. During that time, I cannot remember the city being smoky from forest fires, especially in October! Usually in October it’s already 55 degrees and raining nearly every day. Now people have started to refer to Seattle’s October weather as “Smoketober.”

I don’t know about you, but when I stop and think about climate change, I often feel a sense of dread and I think about: What will life look like for my children? Are there long-term implications for breathing in all this particulate matter? Can I do anything about climate change? Though I sometimes feel hopeless in the face of such large-scale issues, and I know that major decisions need to be made by world leaders right now to alter our current climate trajectory, there are individual decisions we can make.

Brushing your teeth with a bamboo toothbrush, driving a car less, and buying less meat are all helpful and commonly known ways to reduce your carbon footprint. Have you ever thought about how your investments impact climate change? Investing in Environmental, Social, and Governance (ESG) funds can be a substantial way to reduce your carbon footprint.

Retirement Investing and Mutual Funds

If you are a working professional, you probably have access to a qualified retirement plan like a 401k. In the past, it was common for corporations to provide their employees with an income stream during retirement, such as a pension. Now, the obligation to provide for your expenses in retirement is usually up to you. The way this is typically done is by purchasing investments in retirement accounts. Hopefully over the long run those investments grow enough to become a nest egg to live off of during retirement. If you have a 401k you probably have about 15 options of different mutual funds to select from. How do you select which mutual funds to purchase? Do you ask a friend at work? Do you ask a family member? Do you look at the previous returns or other data provided by your 401k provider? 

While choosing a mutual fund may seem like a simple and straightforward process, you might not know that many of those mutual funds have investments in tobacco companies, fossil fuel companies, and companies within the prison industrial complex, to name a few. A mutual fund is a company that pools money together from investors and invests that money into stocks and bonds. Stocks are shares of ownership in a company, and the hope over time is that those shares of ownership become more valuable and you can sell those shares at a gain. 

The Vanguard Target Retirement 2050 Fund is a common target date mutual fund that exists in many 401k offerings. Typically if people don’t know much about mutual funds, they end up putting all their retirement contributions into a target date fund like this. For the climate and socially conscious person they should know that this mutual fund has 759 fossil fuel companies in it! By buying this mutual fund you are becoming an owner of Chevron, Exxon Mobil, ConocoPhillips, tobacco companies, and more corporations like that. 

If you are climate aware, there’s a better option for you and your family that can help you live with integrity and help you achieve your retirement goals.

What Is an ESG Fund?

ESG funds are mutual funds, exchange traded funds, and other investments that screen for environmental, social, and governance issues. After screening for these issues, ESG funds either intentionally include companies that align with their priorities or exclude companies that go against their values. For example, you can find an ESG fund that removes all fossil fuel companies from its holdings and includes clean energy companies. 

Here are the common issues that companies use to build an ESG fund:

• Fossil Fuels

• Deforestation

• Gender Equality

• Civilian Firearms

• Prison Industrial Complex

• Military Weapons

• Tobacco

ESG funds encompass broad categories and they are not all alike. You may find an ESG fund that focuses on including companies with a strong history of diversity and inclusion, though they may not mind having fossil fuel companies in their holdings. Even though a mutual fund may be labeled “ESG” it might have plenty of companies that generate fossil fuels, have negative social impacts, and do not have a history of diversity and inclusion. 

It’s critical to first and foremost understand your values and prioritize them so you can screen which ESG funds match your values. There are good ESG funds. Not all are simply a marketing scheme, but you do need to do your research to find those funds. An excellent website to help you screen ESG funds is: www.fossilfreefunds.org. This website will also tell you the carbon footprint of your mutual funds.

Use Wise Investing Strategies

ESG funds have become more popular over the last decade or so, and you can typically find at least one ESG offering in your 401k. You may get excited and put all your retirement savings into that one fund. Even though you may be ready to exclusively invest in ESG funds, it’s still wise to have a well diversified portfolio. 

I know of one 401k plan that has one ESG fund, and that fund is an emerging markets fund that is concentrated on companies in Asia. It may sound good to use this tool because it is an ESG fund, but you may not want to invest all your retirement money into this tool because it lacks diversification. If something happens in Asia, and the whole market drops 50%, you probably won’t be very happy with your returns. In this case it may be wise to invest some of your money into this fund and then to utilize a Traditional IRA or Roth IRA for your other ESG investments. A Traditional IRA or Roth IRA is independent of your employer and typically has at least 1,500 different investment options instead of the 15 offered by your company 401k.

If you find an ESG fund that matches your values, here’s a list of other important questions to ask yourself to make sure that the fund is something you should purchase:

• Can you create a diverse portfolio with your ESG funds in terms of value and growth, US and international, stocks and bonds, etc.? 

• How old is the ESG fund?

• Does the ESG fund have a strong performance history?

• How many assets are under management with the ESG fund?

• What are the expense ratios associated with the ESG fund? Are the expense ratios something you are comfortable paying for over time?

If you are passionate about making a difference with climate change, ESG investments can be a great way to make a big individual impact. However, make sure you are also implementing a wise strategy to help you reach your goals with those investments. 

How I Build ESG Portfolios

I am personally and professionally passionate about ESG issues. For my clients who are also interested in ESG issues, I help them understand their values and integrate them with their investments. I do hope that ESG investing becomes more popular because I believe it can be an effective path to reduce our global use of fossil fuels.

One of the reasons why ESG investing has not received more widespread adoption is because it’s quite difficult to create an effective ESG portfolio compared to a more traditional portfolio. If you were to ask an advisor at a larger firm about ESG investments, they more than likely wouldn’t be able to help you at all because they typically put their clients into one of eight “model portfolios”. Those advisors use very little critical thinking when it comes to investing their clients' money. The vast majority of advisors at big firms know next to nothing about ESG investing.  

As an independent financial planner, I take pride in building highly vetted portfolios that integrate my clients’ values. I listen closely to my clients’ values, help them prioritize those values, then I screen hundreds of ESG funds to find the right mix to help them achieve their goals.  If you have a personal passion for reducing your carbon footprint or desire to have an ESG portfolio but don’t know where to get started, please sign up for a complimentary meeting with me by clicking on the link below. I’d love to talk with you.