Beat the System: ‘Investing in a simple index fund is immoral’ — why climate-change investing has been more talk than action

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It isn’t about Greta Thunberg.

Sure, the 16-year old Swedish activist just boosted the attention given to the climate-change crisis with her passionate speech at the United Nations.

But we already knew this was a massive and indisputable risk to our living environment, even if many business leaders still haven’t got the memo.

July was the hottest month in recorded history. The last four years have also been the hottest on record. The massive United Nations Intergovernmental Panel on Climate Change has repeatedly warned about the rising risks of man-made climate change. A study of two decades’ worth of peer-reviewed scientific research on the subject found just 1% expressed any doubt at all about man-made climate change.

So it isn’t surprising there’s been a surge in interest in “socially responsible investing,” including funds which avoid major polluters like the fossil-fuel industry.

But so far that’s involved a lot more talk than action, industry data show.

Just 4% of company 401(k) retirement plans offer the choice of a “socially responsible” mutual fund as one of its investment options, the Plan Sponsors Council of America, a trade body, tells MarketWatch.

And just 9% of those who are offered such a fund invest in it, said Fidelity Investments, a major plan administrator. (Fidelity also said a many as a third of the plans it runs offer a socially responsible fund among its options, but could not account for the big difference with the data from the Plan Sponsors’ Council).

Meanwhile research by Morningstar says that despite a surge in interest in ethical investing and socially responsible mutual funds, the total amounts invested remain small.

The number of funds jumped 50% last year to 351, says the research company, and fund flows were a “record” $5.5 billion.

Total assets invested in socially responsible funds? Just $161 billion at year-end, it said.

That’s not even a rounding error compared with the $18 trillion invested in all stock and bond funds, as reported by the Investment Company Institute, the trade association for the mutual-fund industry.

The surprising numbers suggest that the socially responsible investment or SRI trend has a lot further to go than the headlines and industry attention would suggest.

“Investing in a simple index fund is immoral,” says Matt Patsky, CEO of socially responsible investment company Trillium. He says people are routinely shocked when he uses that word to refer to ordinary mutual funds, but he is sticking with it.

Index funds invest passively across the board, he says. They make no ethical distinctions between companies based on how they act. He urges those “with a conscience” to move their dollars to funds that incorporate ethical screens.

Socially responsible funds take account of various social factors before choosing whether to invest in a company. Some activist funds invest in companies they consider bad actors to pressure the management to change. Others avoid investing in certain companies, whether it be tobacco stocks, or defense contractors, or fossil fuel companies.

Some argue that if you sell stocks in companies you dislike, you just leave the profits to somebody else. Patsky argues that this policy of divestment works over time, by making it harder for those companies to raise money and raising their cost of capital. He adds that “socially responsible investing” has also produced higher returns with lower volatility than passive investing.

One good reason of late: The energy sector has been a terrible performer. In the past 10 years the S&P 500 Energy sector SP500.10, -1.33%  has produced total returns of just 44%. The broader S&P 500 SPX, -0.24% : 242%. So virtue, as it were, has been rewarded.