6 min read · Jan 28, 2024
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The biggest message that most finance educators try to hammer home is that we need to start investing. Like, now.
Yes, we don’t know everything there is to know. Yes, we will make mistakes. Yes, it is scary. But for a variety of reasons — the biggest one being compound interest and a LOT of potentially lost earnings — the sooner you start, the better off your finances will be.
So that’s what I did last year. My budget coach suggested the S&P500 ETF. The S&P500, short for Standard and Poor’s 500, is a collection of the top 500 companies listed on the US stock exchanges, combined into an ETF, or exchange-traded fund. Basically, you purchase a small fraction of 500 different shares. By purchasing ETFs, instead of putting all of your money into a single company, you are diversifying your portfolio without having to do a lot of homework. And the major advantage of the S&P500 is that by diversifying your portfolio into this mixture of large US companies, you are highly likely to get decent returns on your investments. Historically, in the last 100 years, the S&P500 has returned about 9.9% interest per year.
I started out with the S&P500 but also learned quickly that there is an equivalent of that ETF for the whole world, so I also started investing in the MSCI World USD ETF (Morgan Stanley Capital International World US dollar ETF). Then, one of my Dutch colleagues said to me one day that I should also be investing in the Dutch equivalent of the S&P500. So I did. Many folks will tell you it is overkill to be investing in multiple ETFs, after all each ETF invests in 500–1500 different companies as it is. But for me, I am just starting out and to be honest I think the best way for me to learn is to try out a few things, particularly early on when I risk losing only small amounts of money.
One day not long ago I had my first ethical dilemma. I was looking at my accounts, and scrolling down the available information for my Dutch ETF (called AEX EUR (Acc)). I discovered the button “What’s in the fund”, and when I clicked on it, I saw a complete list of the companies included in the ETF. Almost at the very top, I saw that over 15% of my investment was in Shell.
For some of you, the 80s might seem like a long time ago. Back then, I was doing bake sales in my high school, and donating the money to support the African National Congress and their fight to end apartheid in South Africa. Back then, folks like me boycotted Shell when we heard about Shell’s involvement in supporting apartheid and benefiting financially from the system of apartheid in South Africa.
After all these years, positive change has come, but we still have so far to go to achieve basic human rights and justice in the world. And although Shell may not be the monster of a company it once was, I still had a visceral feeling in my gut when I learned that I was investing in the company all these years later. So that did it. It is time to learn to shift my money towards investments that sit with me better, in my heart and in my gut.
As with any kind of investing or financial planning, I know this is the start of a journey. I will continue to get better with how I invest, balancing building wealth with trying to be gentle on the planet. But I have to start somewhere. So here are some initial things I’ve learned about ethical ETF investments so I can take a step in the right direction.
What are ethical ETFs?
First off, the word ‘ethical’ has slightly different definitions among different disciplines or professions or people. In general, being ethical means to behave in accordance with a set of principles that are believed to reflect ‘right’ or ‘moral’ or ‘just’ behaviour. It’s easy to read the news these days and see that there are many different ways to define good behaviour or right action. Calling an action ‘ethical’ does not guarantee that that action reflects the highest possible good. Moreover, in situations where there are competing interests, we sometimes need to make difficult decisions about what the ‘best’ action is. So the concept of what is ‘ethical’ differs among different individuals, communities, cultures, political beliefs, religions, or moral codes. Because of this, it isn’t as simple as choosing to invest in ‘ethical ETFs’ and that’s that.
What’s most important to you in a company? Do you want to invest in companies that make products that benefit the planet in some way? Companies that make products using environmentally sustainable practices? Companies that use fair trade practices? Treat their staff fairly? Hire a diverse staff? Companies that handle their businesses with transparency and accountability, and prioritize people over profits?
With your personal ethical priorities in mind, you can start looking at different ETFs through the lens of your values. It can be absolutely daunting to investigate every single company that is included in a candidate ETF fund. You would need to learn everything about each company in order to have confidence that your chosen fund is aligned with your values. For most of us, this is an impossible amount of work. Fortunately, there are a few simpler approaches to get you started.
Classes of ETFs.
Ethical ETFs are often labelled according to the different types of ethical practices an ETF is focused on. For example, an ESG ETF stands for “Environmental, Social, Governance”. An SRI ETF stands for “Socially Responsible Investing”. Different ETFs like ESG or SRI focus on different combinations of values. For example, sustainable or green investments would include holdings with practices or products that focus on the environment. Impact investments would include holdings focused on impact in the world, things like non-profits, education, or healthcare. Moral or value-based investing would, for example, exclude specific products like tobacco or weapons. Single theme ETFs might include companies with a very narrowly defined focus, such as responsible waste management.
What’s in the fund?
As a first step it might be enough for you to find an ESG ETF and go ahead and start investing. It’s a step further than the S&P500 after all, right? Great! But if you have some time and inclination, you can certainly do more homework. That said, with my limited knowledge and skills in this area, I found it actually very difficult to compare ETFs.
You can start by looking at what’s in your fund. What industries are invested in? What companies? And what countries are included in the holdings? You can also look at this in terms of proportion of funds being invested in which countries, industries, or companies. You can look at the total number of holdings. You can also read an ETF’s summary about the ETF focus, and the “key information document”. You may also want to consider ratings of the funds, such as the Morningstar Ratings or ESG sustainability ratings.
Comparisons of a couple of ETFs
I compared:
· MSCI World ESG ETF (iShares MSCI World ESG Screened UCITS ETF USD (Acc))
· MSCI World SRI ETF (iShares MSCI World SRI UCITS ETF EUR (Acc)).
To be honest, I found this exercise really difficult. Both ETFs claim to invest in all industries in 23 developed markets. Many of the companies included were identical. After trying my best to tease out the difference between these two, the main differences I could find were:
· ESG ETF has over 1400 large and medium-sized companies among their holdings, while the SRI ETF had just over 370 in their holdings.
· ESG ETF included Apple and Amazon in their top 5 holdings, and these two were not included in the SRI ETF at all.
· ESG ETF listed a few more companies that I know to have had questionable practices in the past (Exxon Mobil, Wells Fargo and HSBC to name a few), and overall had a higher proportion invested in oil and gas.
· The SRI ETF overall applied stricter sustainability criteria.
I realize looking over this blog that this all looks messy and complicated. It’s a lot for someone like me with no real background in this. But in the words of Marshall Rosenberg, “anything worth doing is worth doing poorly”. For me, investing in more ethical companies is worth doing poorly. A little better is better than nothing. So this year, I’ll be investing in MSCI World SRI.
