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Post: Outside the Box: ESG is less important than you think — look beyond the stock market to drive change

For years now, any financial conversation about doing good in the world, or at least doing less harm, has led to one topic: responsible investing.

It makes sense on a visceral level that many investors and retirement savers don’t feel good about profiting off fossil fuels, assault rifles, exploited labor or any number of other practices. But does investing responsibly as we talk about it now actually make a difference? Likely some, but it has less of an impact than you might think. Fortunately, there are other choices you can make in addition to responsible investing to drive the change in the world that you’re seeking.

Related: Ethical investing is much easier than you think: 4 ways to fund your retirement and minimize harm to humanity

The Impact of responsible investing

The idea of responsible investing is that you avoid inflating or maintaining the share price of a company whose practices you don’t agree with so that you’re not helping to enrich the company’s executives, you’re not personally profiting off ill-begotten dividends and maybe you’re even helping drive change by getting the shareholders riled up over declining value so they in turn demand a shift away from unsustainable and exploitative practices. This thinking has helped drive the growth of ESG (environmental, social and governance) investments over the past decade, and though the ESG term is not yet standardized and is often misused, the retail investment industry moving away from oil and coal companies in particular is a good thing, especially when it’s investment behemoths like BlackRock and Vanguard doing it. The responsible investing push has also led to a movement among publicly traded mining companies to dump their interests in coal mines, in order to improve their ESG scores so they can be included in ESG funds and get the accompanying bump in share price.

Read: Here’s an easier way to think about ESG investing

The problem is that private-equity funds are now lining up to buy those coal interests as well as the shares of companies being unloaded by mutual-fund managers trying to get better ESG scores, because those companies are still profitable.

According to Luciano Siani Pires, executive vice president at Brazilian mining company Vale:

“Precisely because coal-related assets have become toxic for listed companies, private-equity firms are hunting thermal coal power plants and coal mining properties across the world at bargain prices, aiming at juicy returns, as they do not have ESG-minded constituencies to attend to.”

Read: Allowing ESG funds as default in 401(k) plans would just siphon money from investors to Wall Street

The inherent problem with ESG, and any other form of responsible investing, is that there is still ample profit to be squeezed out of the assets many investors are divesting from, so it’s only a matter of time until those without moral qualms capitalize on that fact and scoop up those assets.

With so many investors willing to pick up the shares others are tossing aside, the impact of responsible investing is at this point limited. If the goal is to push down a company’s share price, then we must acknowledge that share price is largely driven by profits, and profit is determined by customers, not by investors. That’s not to say that responsible investing isn’t important or that we shouldn’t do it, but we must not stop there. If we care about creating real impact rather than simply assuaging our own guilt, we must look beyond the stock markets.

Read: My problems with ‘ESG’ investing

Real financial activism

Consider where you’re banking. Unless you buy during a company’s IPO, things get murky when you try to draw a line between your invested money and the acts you don’t want to fund or reward. But, with banking, you can draw a perfectly straight line between the money sitting in your savings account and money going out the door to finance projects like fossil fuel exploration. The biggest banks in America are also funders of the fossil fuel industry. The solution is simple if you bank with them: switch to a local bank or, better yet, a credit union that only funds smaller, local projects.

Consider your role as customer. With customers determining corporate profits and therefore share price, undertaking financial activism means considering your own role in driving those profits. If you won’t invest in big oil and gas companies, for example, but you buy gas from them, you’re more than undoing your own good intentions. Consider your consumer spending and find ways to do better, whether it’s cutting way back on certain purchases, switching away from fossil fuel vehicles and appliances, or simply resolving to spend less generally on manufactured goods.

Pressure your utility providers. With coal and natural gas in particular, the biggest customers are the utilities that generate and purchase electricity, but you are a customer of your utility. Historically, consumers have not thought of the utilities as profit-seeking companies from whom they can demand change, but they are. Speak up to your utility frequently to demand a shift away from coal and gas toward truly sustainable power sources that don’t worsen the climate crisis. If you can make those demands publicly and enlist others to join you, all the better.

Pressure governments. While consumer activism is often underrated in its ability to drive change, it does have its limits. We can achieve significant change through the tools of capitalism, but nothing replaces government policy to limit climate-harming activity and exploitation of people. So speak up often to your state and federal lawmakers, and demand more action. Do it publicly when you can, and don’t let up. Time spent pushing for policy change is one of the most responsible investments you can make.

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