Ethics, Index trackers, Investment strategy, Mindful investing

The altruistic FIer: How to create a helping portfolio

The dilemma:

You want to be financially independent and to retire early. Maybe pursue things you value rather than be compromised by the rat race and consumerist culture. All great, but two inconvenient issues are raised for the ethically minded.

First, most aiming for FI invest in the world’s top financial markets that buy into large corporates not known for their ethical standards. You don’t have to search far to find articles on the exploitation of workers, the world’s poor and the like. Many of the top companies trade in arms, tobacco, gambling, pharmaceuticals. Then there’s savings – Big banks, well, what do most of them offer the world?

Second, FI means moving out of the workforce early, which for most means no longer contributing economically, to skills capacity building etc. and no rolling income to make regular donations to charities (unless factored into your FIRE spend). Charities rely on regular giving and governments rely on tax receipts as a means to wealth redistribution (arguably, I know). Although this post doesn’t really address this, it’s something to consider in my Path 2 life design.

Navigating the world of ‘ethical’ investment…

Also, if I’m honest, I’m uneasy about our Little Firelite seeing me not working. Morally, is that the right or best thing to do as a parent, knowing that it could lead to a skewed attitude towards (paid) work?

Now, my intention is not to make you feel guilty for all your hard work with saving! I’m basically voicing some of the thoughts that have been rolling about in my head and trying to resolve these incongruities… Can we seek financial independence (FI) without adding to the world’s problems while we’re at it?

In this post, I introduce the idea of a ‘helping portfolio’. This I feel is a better way of thinking about the situation than my original question, which was: Are ethical funds worth investing in? That in itself is a strange question if you think about it for a while. But whether you go for ethical funds or not, I now think they should be viewed as part of an ‘ethical’ FI strategy, rather THE go-to ‘ethical’ FI approach. If you are in any way ethically minded, a better question to consider may be: To what degree will my giving portfolio overlap with my financial one?

FI can be an ethical choice… Can it?

When freed from the ‘shackles’ of the capitalist machine (and this applies at every level), we can focus on what matters to us, and the social and environmental world. For many, this is the antithesis of corporate life. To achieve FI, most adopt a frugal and moderate lifestyle. By literally slowing down your spending and consumption, your carbon footprint treads lighter. The space instead is filled with experiences of inherent positive value, which hopefully is more attuned to positive action.

But there’s no two ways about it – wanting to make a difference will slow down your path to FI. For example, one of my rules is to keep recurring payments from my bank account to a minimum. Since considering FI consciously, when I recently kept a tally of my spends, I decided to stop regular donations to a water charity and a left-leaning newspaper. I reasoned that I’d donated to the former for a while and that the latter I didn’t really read THAT often online. But I was reasoning it. I didn’t believe in the purpose of these organisations any less.

Why ethical funds introduce new problems

However, the more I looked into ethical funds, the more I realised that it wasn’t only about weighing up the somewhat lower returns of these funds (partly due to higher costs associated with researching these companies) or that ‘ethical’ was defined differently by different funds (which then also vary in how much diversification is reduced). Both are true and both widely written about*, so I won’t repeat the points here. For me, most of all, it brought into question whether an ethical fund would actually have its intended effect. Might the choice might even be unethical?

Yes, you read that right, there are two key reasons for why it wouldn’t have its intended effect, which boil down to ‘you’re not buying into those companies themselves’ (unless it is an initial public offering) and ‘by not buying certain unethical companies’ shares, you may make them cheaper and thus increase their attractiveness to other buyers’. You can read more here. Therefore, ethical funds do not work the same way as boycotting does which directly hurts sales, decreasing demand and thus potentially the unethical effects the company can have. Not buying certain shares (e.g. if it’s excluded from an ‘ethical’ index) may drive demand (for the shares) and mostly has no impact on the unethical effects of the company.

Then, it seems to become more of a matter of principle – not buying because of what it symbolises. But investment houses that offer an ethical fund generally do so because there’s a market for it; they’re not driven by a moral compass and their other funds won’t fit such credentials.

Despite what I’ve written so far, I’m not for a moment suggesting NOT to invest in ethical funds. What I’m suggesting is that many factors need to be taken into account to help make your own personal decision. What’s unethical or socially responsible is a personal matter. What’s clear is that this involves lots of complex decision making and a patience for nuance!

The helping portfolio

This all got me thinking about the various ways one can invest and save in less or more ethical ways. I began thinking about “Investing ethically” in a broad sense – investing in ‘doing good’; the return might be in your own pocket or it may be in that of the good you’ve done. I created the helping portfolio as a framework for thinking about ‘ethical investment’, conceived as a Venn diagram below.

‘Ethical’ companies may be considered as one of various ways to invest in ‘good’ for financial return and ‘giving’ on the other hand includes donating money or time. Then, there’s investment or lending that will financially benefit others’ positive action. (I guess if I had a third Venn circle, it would be ‘buying’.)

The Helping Portfolio: A way of thinking broadly about ethical investing

Given the pros and cons with ‘ethical funds’ and other methods of investing ethically, it makes sense to me to borrow the financial principles of diversity and balance in our helping portfolio. A ‘balanced’ portfolio might mean buying into ethical funds, but also financially supporting ‘ethical’ or ‘socially responsible’ projects directly (e.g. through microlending, ethical peer lending projects) and donating to a range of initiatives that sit with my personal values.

There are many ways you can make ethical decisions through the various financial products within and between Venn circles. You may decide not to buy into funds that avoid certain companies, and focus on buying companies that you’d like to promote from an ethical standpoint. Or you may decide to go for an ‘ethical’ IFISA (Innovative Finance ISA), such as funding green projects that may typically give 6-10% interest with incremental repayments occurring at set times. You may microfinance poor farmers in Ecuador to help them expand, and you may decide against microfinancing chicken feed or butcher businesses. Or you may actively seek to get the highest returns on your investments irrespective of ethics in order to donate to the causes you believe in.

My helping portfolio

At the moment, I’ve no ethical funds – all my funds buy into very broad indices. Whilst not ethical, I think I’m okay with this on balance, and there’s an argument that this is preferable to buying, say, into the FTSE 100, concentrating wealth at the top which tend also to be the most ruthless companies (though this is to a degree an assumption).

My only obvious ‘ethical’ investment as conventionally considered is into a solar energy product – or rather, lending money so that African families who otherwise may have no energy source can buy it. I have some of this within an IFISA, which is part of ones ISA allowance. I also do microlending to ‘entrepeneurs’ in developing countries through a charity (this I really like), and I donate small amounts per month to 4 charitable causes. I also regularly ‘sponsoring’ friends in their fundraising events probably amounting to around £12 per month.

Resolving the ethical dilemma: Various shades of green

Perhaps the best solution to the ethical issue around the notion of ethical funds is to continue to invest (and save) using a broad-spectrum approach and, if the returns are good, make a pact to contribute more on the ‘giving’ side. There are almost certainly more effective and/or direct approaches to not supporting a particular type of company – by not buying the product, to campaign, or to fund/support alternative products.

I have asked: Do I want to symbolically own a bit of company that might be involved in arms dealing? No, I don’t. But if it makes zero difference to the arms that are sold or made and I’m not actually involved in any way in that process, is it better to have a very, very small bit of the company and use the return to do good? I think, probably. To take an imperfect analogy, if I was THAT dark green about eating meat, then I wouldn’t shop in any company that involved dealing with meat, like shops. This, of course, is all only my own personal opinion that I offer to illustrate the points above.

Many ethical funds avoid petrochemical multinationals, such as BP and Shell, because of the impact of petrol for our environment. But if you drive a petrol car, you are supporting these companies. I take buses – this also supports them, albeit not quite as directly/much. I also buy many products that have been carted by a petrochemical-fuelled machine for a gazillion miles to arrive at my local supermarket. This might seem very indirect, but arguably more direct than buying into the FTSE all share index that buys into hundreds of companies.

Another consideration is risk. ‘Ethical’ investments often pose higher risks which may not fit the cautious investor. Perhaps lending smaller amounts to support others’ business growth with no expectation of financial gain could be a great way to help others while (kind of) protecting ones money (as original capital is always at risk; e.g. if the business falls through). This perhaps works best to help support ‘green’ technologies and products get off the ground, and small business owners in developing countries too. Another important question is whether you primarily want to avoid certain ‘unethical’ ventures or to positively contribute to more ethical living. Supporting biofuels is an example that may eventually shaft the likes of BP out of the charts!

Listing the various ways anyone could add to a helping portfolio made me realise the gaps I’d not really truly considered before thinking about ethical funds! A blindingly obvious one is my savings accounts – I bank with a major bank, and some of my longer-term savings could be held in mutuals rather than the usual companies, right? Also, there are ways to financially support ‘ethical’ start-ups by investing in shares directly, or crowdfunding a product.

I’ve had a look around at a number of ethical investments, such as Abundance, and start-up investment platforms, like Crowdcube, and nothing as yet has jumped out at me. I think it’s about waiting for the right projects to come along, but now I’m primed for it. As capital is at risk, this will be a small proportion of my financial portfolio. I’ll slowly consider a more ethical approach in future savings and investments, but I think the mainstay will be simply giving and featuring this in my out of paid work and FIREd outgoings.

I still consider myself near the beginnings of thinking about these kinds of issues, and I welcome any comments. Thanks for reading.

*Further reading – great blog, but shame it’s not kept updated anymore!

2 thoughts on “The altruistic FIer: How to create a helping portfolio”

  1. I hear what you’re saying about no longer contributing economically, but that’s only in termns of paying national insurance and income tax? Once FI, you still have to buy food, pay for services, pay for your holidays – all these are linked to the economy. Time can also be donated to charity, eg volunteering instead of money, if not accounted for in your FIRE spend.

    And as for reducing my carbon footprint when FI – I’ll have more time to travel so will be clocking more airmiles (although those planes would be flying regardless of whether I’m on them or not…) – not sure I’d be happy with the option of not travelling?

    My investments are full of ‘sin stocks’ – oil, tobacco, gambling, mining, banks. My view is that my not investing in them is going to make very little difference. That said, some of my newer investments include purchasing stock in firms which are ‘cleaner’, eg solar power company and renewables – more to appease my conscience really. My not buying drinks in plastic bottles this year is probably doing a bit more ‘good’ to be honest, and at least that’s something I can control!

    Liked by 1 person

  2. Hi Weenie,

    Sorry for the incredibly delayed response! Work’s been seriously crazy.

    Yes, I’m hoping that’ll be part of my plan – to donate time and skills to a cause once I ‘retire’. However, whether it’s actually of value to the same degree as donating say 10% of my income in my current job would be debatable! I am of course coming from an angle of someone who’s actively seeking out the cause I most value supporting and how I might best do that. It does remain to be seen whether I will donate my time/skills.

    Of course, everyone has their own values and priorities, so I know this post isn’t for most people. 🙂 I hear what you’re saying about travelling. I’ve been guilty of it myself as I have travelled quite a lot in the past, and that has been life changing so I can’t say I regret it at all. I imagine when I’m older I will be able to travel at a slower pace – I love long train travel!

    Well, I do have index funds that invest in all sorts, just as I mention in the blog post. Great that you have got some ‘greener’ stocks. I was so on the cusp of investing in a project or two in Abundance (peer lending to ethical projects), but I do wonder if it’s a bit (too) high risk (for my liking). I prefer from experience not to invest in shares of individual companies (just check them too much), but never say never.

    So, you’re not buying drinks from plastic bottles this year? That’s a good idea! Have you managed all year so far? I wonder how many plastic bottles I get through… I seem to drink more cans than bottles (on the go), though by far more coffee. I sometimes wonder if I’ll cut out coffee and stuff like that anywhere near how much I think I will once I leave work…


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