I graduated a couple years ago, but it’s only recently that I’ve had a cushy full-time job that pays me significantly more than I need to live comfortably. And that means that despite my interest in personal finance and retiring early, I am finally succumbing to some lifestyle creep. Fortunately for my wallet, I still have no desire to buy the latest flagship smartphone, move into a bigger house, or drive a luxury car (well, maybe a Tesla). Instead, my lifestyle creep has manifested in spending more for the “sustainable” choice: buying Allbirds instead of Pumas, buying organic rather than conventionally farmed food, and paying the small premium to get my electricity from wind and solar rather than fossil fuels.
While a lot of my choices surrounding consumption have changed, one area that’s been slow to change is where I’m investing. This might seem surprising, given the recent trend of “Sustainable Investing” — also sometimes called Socially Responsible Investing (SRI) or Environmental, Social, and Governance (ESG) investing. Part of the reason I haven’t changed much is that the “sustainable” funds most accessible to me don’t seem to actually be that different from normal index funds: compare the holdings of Vanguard’s ESG fund to their total stock market fund. But I was also hesitant because until recently I wasn’t convinced that buying stock of sustainable companies actually did any good.
My thinking went as follows: if I buy stock in a sustainable company, that money doesn’t go to the company — in the best case scenario all it does is raise the price of the stock (and therefore the valuation of the company) a tiny bit. So changing my shopping habits would do a lot more to give money to companies I think are doing good things than buying stock of those companies. I didn’t even think raising the stock price did any good, but after doing some digging, it seems there are some benefits. Some researchers have modeled the effect of sustainable investing, and found that a preference for sustainable companies does lead to societal benefits that arise from their stock prices going up:
- It lowers sustainable companies’ cost of capital (basically, it makes it easier for those companies to raise/borrow money)
- It encourages companies to become sustainable so that sustainable investors will buy their shares and drive their share price up
So at some point it may be worth revisiting the funds I’m invested in and perhaps choose some that hold companies explicitly connected to sustainable activities. But for now, since I’m not willing to pay a 2% expense ratio and the amount of money I have to invest is so small anyways, I’ll leave it to the professionals.
However, even though I’m not shifting all my stock holdings into sustainable companies/funds, I have found some other investing activities that seem like they make a more direct impact. One option would be to buy bonds from sustainable companies, because in that case your money is going directly to the company. (I haven’t pursued this because it’s not super convenient to buy bonds from specific companies.)
Another option that gets your money directly to the company is to buy equity during fundraising rather than buying stock on an exchange. When you buy stock of a well established company on a stock exchange, your money goes to some other person selling their stock, not the company. But if you buy the stock when the company is issuing it, your money goes directly to the company and can be used to do something (hopefully) useful and good. I didn’t think this type of investing was available to the general public, but it turns out there are some opportunities that don’t require you to be an institutional or accredited investor. Here’s one example I’ve been using.
From the finance perspective, is investing in these startups as smart as just putting more money into my brokerage account? Definitely not: it’s way higher risk. Consequently, I’ve just been putting small amounts of “play money” into these companies (i.e., money I can afford to completely lose), more to feel like I’m doing some good than to achieve financial goals. So while my investment choices haven’t shifted as rapidly as where I’m buying my clothes, I’m at least at the beginning of a path to sustainable investing that I actually buy into.