Ethical Investing — some ideas to consider.

You’ve reached that mid-afternoon slump in your typical day at the office and are trying to come up with something to do that doesn’t involve completely skiving off. Then the idea comes to you — check your retirement funds! There’s nothing that cheers you up more than thinking about financial freedom, and it also qualifies as being work-related (kind of).

Why You Should Learn About Investing.

If you care about social and environmental issues, then it’s important to think about the money you save as well as the money you spend. If your money is held in a fairly basic savings account you can be sure that your bank is getting a good return from it by investing it in all kinds of stuff (some of which you may not like). So you miss out on an opportunity to invest in something you believe in and to get closer to a degree of financial independence that would allow you take time off to focus on something that’s meaningful to you.

I came across this Albert Einstein quote recently:

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.

Money invested in a stock with a 7% dividend yield will double every 10 years (so $10K will become $80K in 30 years) and that’s ignoring any increase (Hopefully!) in the underlying stock price. If the $10K was placed in an account with a 1% interest rate it would take more than 200 years to turn into $80K.

So, bearing in mind that I’ve mostly focused on stocks or funds with a decent dividend yield, let’s take a look at some options!

Are Socially Responsible Funds Any Good?

An obvious place to start is to take a look at socially responsible funds, which are comprised of stocks or bonds that have been screened for ethical impact. A popular one, the Vanguard FTSE Social Index Fund (VFTNX), consists of a bunch of familiar stocks such as Apple, Johnson & Johnson, McDonald’s, P&G, and PepsiCo. Looking at these names, it’s hard to see how this fund is really raising the bar on ethics. Most of these companies treat their core employees pretty well, but they each have issues (contractor working conditions, animal welfare, climate change, agriculture, land use, supply chain, etc.) big enough to make me want to look elsewhere. I’ve yet to find a socially responsible fund to get excited about, but they are sometimes the best of a bad lot if you’re in a company retirement plan with few choices.

Suggestions for Ethical Investments

Here are a few ideas for investments that more actively support positive change.

Support Your Community: Municipal Bonds

I’m not a big fan of government bonds but municipal (muni) bonds are region-specific and go towards improving schools, public transport, infrastructure, etc. Muni bonds have been recently launched in the UK in response to budget cuts to local councils and are common in New Zealand and a few other countries. The dividend yields are not that high (e.g., 2.5% for the California muni fund, PWZ) but in the US they are exempt from federal taxes, and also state taxes if you buy a fund corresponding to the state you live in.

Green Property: REITs

Real Estate Investment Trusts (REITs) are basically property funds that get tax benefits because they pay out a high proportion of their income to shareholders (> 90% in the US). My approach here is to invest in REITs that have a preference for constructing or renovating green buildings. This paper is a little out of date but has a handy table listing the percentage of buildings owned by various US REITs that are are either Energy Star or LEED certified. LEED (Leadership in Energy and Environmental Design) is the most common certification in current use, but newer standards are emerging such as Living Building and Zero Net Energy (here’s a helpful guide to the different emerging certifications). My choice for now is Franklin Street Properties (FSP; dividend yield: 7%) but I’d love to hear other suggestions for green property REITs.

A Renewable Energy REIT

One REIT called Hannon Armstrong Sustainable Infrastructure (HASI) is quite unique in that it finances the development of land for alternative energy projects (wind and solar) and building upgrades that improve energy efficiency. The current dividend yield is 5.5% and this should increase to 6% with their expected annual dividend increase in December. Hannon has calculated that it reduces 1.8 million tons of CO2 annually.

Renewable Energy: YieldCos

The YieldCo is a new development that’s typically a subsidiary set up by an energy company to serve as a high-yield investment in alternative energy. Some are better than others in terms of both ethics and safety as investments. My favorite for now is Pattern Energy Group, Inc. (PEGI; dividend yield: 7%), which is focused on wind energy. If you’re interested in stocks in renewable energy technology like wind, solar, energy storage, fuel cells, biofuels, geothermal, etc., a good resource is Tom Konrad’s website.

Buy Companies You Believe In!

If you want to start out with something more familiar, then a logical approach is to invest only in companies that you already buy products from. Come up with a list of candidates and then narrow them down by doing some research into both the ethical and financial sides. Apply the same criteria that you would when rating brands as an ethical consumer and find companies that you believe deserve should do well, to the point where you’re willing to bet on that. You get the idea

Disclaimer: I own stock in FSP, HASI, and PEGI.

Post was originally published on the Green Stars Project blog.