socially responsible index funds

Socially Responsible Index Funds: How to Invest More Ethically

My boyfriend is a nerdy straight white man with eco-anxiety. A few months ago, when we were having out monthly money date, he said to me “I can’t invest in fossil fuels anymore. They’re literally killing the planet. It’s stressing me out to invest in them.”

And yeah, climate change is the biggest problem we’re facing right now. We’re basically rocketing towards irreversible damage for both the planet and humans, and a lot of it IS because of fossil fuels.

I considered Tbone’s request. He doesn’t make very much money, and due to a horrible mix up, he didn’t really start investing until around 29 years old. He’s by no means wealthy. I wanted him to stay in the portfolio we had already built because that has the best chance of growth.

But he didn’t want that, and it’s his money. He wanted to invest according to his deeply held beliefs, and so I said “Ok. Let’s divest baby!” (Want to get clarity on YOUR personal financial and lifestyle values? Get our free worksheet here.)

Since then we’ve been transitioning his holdings away from any index funds that have fossil fuel companies. Today he is 80% divested and should have a 100% fossil fuel free investment portfolio by next month.

A lot of people don’t think that they can invest ethically because it’s too expensive, too hard to do, or won’t produce as much profit as unethical investing.

But that’s simply NOT TRUE. Ethical investing doesn’t have to be super expensive, confusing, or hard. Having gone through the process of aligning Tbone’s investments with his beliefs, and having spent countless hours researching the process of ethical investing, I’m here to tell you: you can make investing choices that align with your financial goals and your personal values.

Plus, you can help change the world through your investments. So here is your guide to investing in socially responsible index funds.

What Are Socially Responsible Index Funds?

Why is Amazon the behemoth it is today? Because it works fast and it’s simple to use. That’s the makeover that ethical investing needs, and that’s exactly what socially responsible index funds (or SRIs) offer.

Socially responsible index funds are a way to simplify your investing life while helping out Mother Nature AND saving for your future. It’s easier than ever before to invest in them, and this guide will walk you through how to do it.

As a reminder: an index fund is a bundle of investments that track the performance of an index. An S&P 500 index fund tracks the S&P 500 index, which is one of the biggest and most valuable indexes in the US stock market. If you ever hear that “the market” is down, there’s an 80% chance they’re referring to the S&P 500.

So, socially responsible index funds are index funds that track an index that is at least TRYING to be less shitty than your typical capitalistic companies.

What Kind of Investment Options Do SRI’s Offer?

With socially responsible index funds, you can invest in a variety of causes that align better with your world views.

Some options are:

-clean energy companies

-companies with gender equity initiatives

-companies that don’t use prison labor to produce their products

Are Socially Responsible Index Funds Less Profitable?

This is the word on the street- people don’t want to invest in ethical investments because it’s not as profitable.

Two decades ago that was true. But the world has changed and so has the world of money. “A Morningstar study showed that in 2020 three out of four sustainable equity funds beat their Morningstar Category average, and 25 of 26 ESG equity index funds…beat index funds tracking the most common traditional benchmarks in their categories.” AKA- ethical funds made money in 2020!

Sustainable investing is the way of the future. People are realizing exactly how much climate change is going to f*ck everything up, and they’re demanding industrial change. People and institutions are divesting from companies creating climate problems. Columbia University is currently in the process of divesting from fossil fuel companies after students demanded change.

As companies realize how costly climate change is going to be and exactly how much it’s going to change life for us, more of them are turning towards more sustainable means of production.

Even BlackRock, arguably the world’s biggest investor in oil and gas companies, has made several investment moves towards more sustainable energy initiatives. In 2020 BlackRock CEO Larry Fink wrote that climate risk is investment risk, and he echoed that statement in 2022.

“In a few short years, we have all watched innovators re-imagine the auto industry. And today, every car manufacturer is racing toward an electric future. The auto industry, however, is merely on the leading edge – every sector will be transformed by new, sustainable technology,” wrote Fink in his annual letter to CEO’s.

I mean if a ruthless capitalist like Larry Fink can see that the future is socially responsible investing, we as retail investors should listen!

How to Start Investing in Socially Responsible Funds

First, you’ll pick an area of social responsibility you want to boost via your investments. The causes with the most socially responsible index funds available, are fossil fuel free funds and gender equity funds.

Need help sorting out your personal values and getting clear on your investment goals? Get our ethical investing guide for free right here.

Most brokerages now highlight their socially responsible investments for users. Head to your brokerage page and look for ESG funds.

ESG stands for Environmental, Social, Governance. It’s a shorthand that brokerages use to highlight the funds that are involved in one of these initiatives. Finding these funds at your brokerage is good starting point for your ethical investing journey!

The next step is to review your current investments. You may have some ethical funds already, or you might be 100% invested in Exxon. Our ethical investing workbook helps you review your current investing and spending habits to get a clear understanding of what your money is currently supporting.

The final step is the most important one: selecting socially responsible index funds that you WANT to invest in! This is the big kahuna. Review the holdings in the fund to make sure there’s no companies you hate in the fund.

Ethical investing is much easier to do that most people would have you think, and it can have a big impact on the world.

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2 thoughts on “Socially Responsible Index Funds: How to Invest More Ethically”

  1. Was really excited to see this topic addressed but I think you should expand. Still waiting for the specific recommendations… Vanguard funds? Anything you found that worked for these principles? How did you handle the transition exactly?

    1. Specific fund recomendations would be *illegal* and I’m not trying to get arrested, so I can’t provide those. 🙂 But the transition is exactly the same as exchanging or buying any other funds!

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