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America is burning, convulsed by anger over a militarized police presence and by a sense of impotence in the face of an economic system that lets the rich get richer at the expense of everyone else.
There’s an uncomfortable contradiction within the American economy: it’s the home of both hyper-capitalism and an intrinsic do-gooder impulse that make its citizens famously more charitable than those in many other countries.
Yet for any American who sees images of social injustice, rampant inequality or dysfunctional civil institutions, and wants to “do something,” there are few options for actually putting one’s money where one’s values are. The world’s biggest economy is fractured and hard to rein in and its corporations are too powerful for most individuals to sanction. And all too often, making change on the local level means dealing with the legacy of years of policies designed to benefit the wealthy.
“Most ‘socially responsible investing’ as we currently do it fails because most injustices cannot be measured on the company level,” said Perth Tolle, founder of Life + Liberty Indexes.
Tolle’s novel approach to quantifying the impact of freedom on investments has grabbed media attention and industry accolades. In 2019, when MarketWatch profiled the exchange-traded fund she launched to capitalize on those ideas, Tolle said, “it is freedom that allows the emerging markets of yesterday to become the developed markets of tomorrow.”
Yet, her fund, the Freedom 100 Emerging Market ETF FRDM, +1.49%, invests only in equities in developing countries with freedom of speech, freedom of the press and the right to protest, as well as government accountability, due process and the rule of law.
“In a system that allows for those things, injustices can be corrected,” Tolle said in an interview in May.
Tolle’s innovation — a measurable way to quantify the impact of social good — stands out in an industry that many observers find hypocritical on the subject of social responsibility. “ESG is a complete fraud,” noted venture capitalist Chamath Palihapitiyav told CNBC in February.
As MarketWatch has reported, some of the biggest Wall Street-sponsored funds that sport “socially responsible” labels invest in ventures that are anything but. Three State Street ETFs that use the phrase “Fossil Fuel Reserves Free” in their names have overall fossil-fuel exposure as high as 7.4%, for example.
But Tolle’s methodology also only reflects a basket of stocks in emerging markets, not developed ones, and works best when comparing countries, rather than companies or metro areas or individuals, against each other. The fund has been open 12 months, and has attracted $22 million in investor assets. It’s lost 11% of its share price in that time, even as the S&P 500 SPX, +0.31% has gained 11%.
Americans may take comfort in the reality that no matter what the conditions are in the U.S. right now, it remains much freer than, say, China or Russia. But that can feel like very cold comfort, especially at a moment when those rights may feel eroded.
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That’s where Josh Levin hopes to make a difference. He’s chief strategy officer and co-founder of OpenInvest, a company that develops tools for financial advisors to customize client portfolios to reflect individual values.
“ “Racism is a cradle-to-grave, systemic issue, which is why the frustration is boiling over” ”
OpenInvest has indexes built around some familiar social causes — reducing greenhouse gas emissions, divesting from the prison-industrial complex, supporting women leaders — but also on racial justice.
The company created the investing tool because, as Levin put it, “there has historically been a big gap in the socially responsible investing space on that issue. But racism is a cradle-to-grave, systemic issue, which is why the frustration is boiling over.”
“In order to approach a systemic issue, you can use your vote and make political changes, but through your assets you also have a piece of control of these entities, which are more powerful than many governments,” Levin told MarketWatch.
To combat racial injustice, OpenInvest’s index screens for metrics like board member inclusion, workforce diversity and which companies pollute the most in communities of color. More recently, it’s also begun to allow investors to target geographies, whether to allow increased investment in companies that employ people in a poor part of the country, or to let investors divest from a state that’s implemented laws they deem objectionable.
See: ETFs can bring fairness to finance, says LGBTQ+ pioneer Barney Frank
While Tolle focuses on freedom in emerging markets, Levin thinks major corporations wield more power than many components of government, making them a worthy target for change. But it’s also important to keep in mind that publicly traded companies are just one piece — if a large one — of the overall economy.
When people express a desire to “do something” with their money, they may be thinking of local communities and public services that Fortune 500 behemoths might seem to have little direct impact on.
After all, much of what Americans take for granted in the mundane day-to-day — “when you turn on the tap and water comes out, or you drive down a street that’s paved” — owes its existence to the $3.9 trillion municipal bond market, noted Daniel Bergstresser, a finance professor at the Brandeis International Business School.
It might be tempting to try to invite other investors into the financing of public services—not just infrastructure but schools, community spaces, education and more. But as Bergstresser pointed out, in recent years, creative municipal financing often has meant desperate public entities striking deals with Wall Street that don’t go so well for the community.
The Intercept recently tracked the recent water crises of two American cities: Flint, Michigan and Pittsburgh, Pennsylvania, to a private water company named Veoli.
OpenInvest’s Levine says that’s why his company is working as quickly as possible to offer access to other types of asset classes and investments. “The investor of the future will have a portfolio of ESG equities, ESG fixed income, crypto and micro investments,” he said. For now, “invest in black-owned businesses!”
For Bergstresser, who says “there is a lot of baloney that gets sold as ‘ESG,’” there is an irony in the Wall Street rush to monetize socially responsible investing.
“Many of the aims of socially responsible investing are things that in an earlier generation we would have said are the responsibility of the government,” he said. “There are a lot of good intentions in socially responsible investing, but much of it reflects an implicit giving-up on what government is capable of accomplishing, and on the idea that rich people should pay taxes.”
In a country that may feel like it’s losing its collective soul, it’s even more critical to remember the social contract, Bergstresser noted.
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