Index Funds and the Environment
“Every time you spend money, you’re casting a vote for the kind of world you want.” – Anna Lappe
Many years before I heard about the concept of financial independence, I was an ardent environmentalist. To the best of my ability anyway. I’m not very good at being an angry activist, so I typically try to do what I can by changing things in my own life, having conversations with friends and family, leading by example and donating money to environmental organisations when I can.
That was why, when I discovered the financial independence (FI) community and some of the great personal finance blogs out there, the ones that appealed the most to me were always the ones that intermingled environmental concern with their frugality and money badassity. There was never a doubt in my heart, that our journey to FI would be intermingled with planet-conscious choices to the best of our ability. That is why I wish to discuss some of the issues and conundrums we are facing on our journey.
By and large, index funds are considered the end all, be all by many in the financial independence community when it comes to investing. From a purely monetary perspective, that obviously makes sense. They have the lowest fees, and they are automatically adjusted towards the market.
One of the issues I have with index funds, however, is that they, by virtue of going for a market average, takes their biggest slice from the biggest companies. When I look at the cheapest index fund in Norway, three out of the five biggest allotments are oil companies (the other two are a bank and a cellphone/internet service provider). This concerns me. I want financial independence, but I don’t want to support an industry I believe, at its heart, is dying and that has been allowed to wreck havoc on the planet for far too long.
I realise that is rich, coming from a Norwegian whose country only grew wealthy once we found oil back in the sixties.
How do we choose then? Believe me, if you have the answer to that, I would love to hear it. I have been financially insecure far too many times to be willing to sacrifice my newfound security in its entirety. I see the math of index investing and I understand it. But what else can I do?
Before I knew anything about the FI community, I knew investing in funds was considered a good thing to do. I also vaguely understood the power of time and compounding interest, though not to the extent I do now. With that in mind, I asked my bank to open the stock/fund investing part of the bank for me, which they obliged.
Obviously, I had no idea what I was doing. I went to meet an adviser (whose advice I disagreed with and went against in its entirety) and started picking funds I felt aligned with my values. These were mostly funds with names such as “global ethical” and “environment and climate fund”. Over the years, the latter came to be my favourite, and I would squirrel away a couple dollars here and there when I could. As a student, it was usually no more than $10 per month, but it did add up.
Now, because I started this meek investing early, even if I never invested large amounts, I did get to see the power of time first hand. As it stands, the value of that little account is currently over 30 % dividends! It blows my mind every time I look at it, even if the monetary value wouldn’t get us very far.
Of course, these were all managed funds. My favourite fund has annual fees of 1.5 %. Your average index fund is usually somewhere around 0.3 % (in Norway). Five times the fees, ouch. I want to keep investing in this one because I want my money to vote for a better world. But can I justify it economically? For that matter, how do I know that the companies the ‘environmental fund’ invests in actually aligns with my ethics and interests?
By comparison, another bank recently released a ‘low carbon’ fund. They only want 0.7 % in fees, so only take twice as much in fees as your average index funds. Is that the price I am willing to pay? Is that my line between payoff and morale?
The answers to all this? I do not know. This is still something we are struggling with, and I expect we shall continue to struggle with it for many years to come. Perhaps if I manage to source enough passive income that the investing is nothing but an extra safety cushion? Perhaps then can I shovel all my money into green energy? But that feels wrong. My entire green-hippy treehugger self rallies against such a though. We want it all.
The first time I became aware of how important money can be after finding the FI community, was while listening to the Mad Fientist’s interview with the amazing Vicky Robin (author of Your Money or Your Life). Like so many when they find something new, I had been so hyperfocused on my newfound path to FI that I had almost let myself to forget my first love for environmental protection. Luckily that only lasted for a few months until Vicky pulled me back again with her candid and honest talk about investing in local businesses, solar panels, self-sustainability and green energy.
In the end, I think everyone with an interest in FI has to make up their mind with regards to just how much they wish to take these questions into account. How much of their portfolio they want to invest in idealism, and how much they are willing to loose in fees for the sake of trying to make the world a better place. There are other ways to do that as well, such as donating, volunteering, recycling etc. But I think this is a rather large question (for many FI’ers, the sums they handle is large, so their impact is potentially large as well!) that is worth discussing.
I would love to hear from other people who have pondered these things. Did you reach a conclusion you are comfortable with? If so, what was it?