OL 125 Module Six Scenario

Mike’s passion for the environment is a major step towards realizing his personal value and take responsibility for the planet’s future. Investing in environmentally friendly funds helps him reward ethical companies. His support will also make companies make more responsible choices such as reducing their overall carbon footprint.

However, I would advise Mike to invest in solid conservative performers that invest low in environmentally friendly products. This choice is informed by the fact that if he invests in the second environmentally friendly companies, he would have to give up on his return on investment. Hill (2020) who analyzed data on a 10-year comparison basis, found that funds that were classified as socially responsible underperformed standard indices. Moreover, these funds tended to carry higher risks than S&P 500 funds because they were less diversified in their holdings. On other indicators, the author highlighted, that these funds had higher expenses that significantly reduced the investor’s total return. Having analyzed the risk/reward profile of funds that align with his interest, he should not follow his passion.

With increased hype on tackling climate change and social responsibility, many companies may just claim to align with these factors but practice differently. For example, Volkswagen’s commercial and general image portrayed social responsibility in its “clean diesel” cars until it emerged they used defeat devices that cheated on emission tests. The definition of environmental friendly has become a mere vehicle for funds to draw on “concerned” investors who unsuspectingly may not realize the true impact of those companies. However, companies that pollute the environment have often acknowledged this shortcoming and invested in R&D to solve the issue. Mike should focus on his returns as he seeks to find suitable investments.

References

Hill, J. (2020). Environmental, Social, and Governance (ESG) Investing: A Balanced Review of Theoretical Backgrounds and Practical Implications. Academic Press.