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Is Sustainable Investing Effective Altruism?

More and more investors have flocked to mutual funds and ETFs that allow for direct capital investments in companies that we believe are doing more good than harm. This trend – sustainable or ESG investing – has grown in popularity as investors become increasingly aware of their money’s role in promoting social and environmental change.

But is sustainable investing a form of effective altruism? Effective altruism is a philosophy and social movement that aims to use resources in the most effective way possible to help others. Typically, this means prioritizing neglected or overlooked causes or offering the most bang for your buck in impact.

So does sustainable investing meet these criteria? Let’s take a closer look.

Building Interest, Building Returns

In recent years, there has been an increasing interest in sustainable investing from both individuals and institutions. A 2019 study from Morgan Stanley found that 95% of millennials are interested in sustainable investing, and 67% are already doing it. Moreover, multiple studies confirm the lion’s share of institutional investors globally now consider sustainability when making investment decisions.

The reason for this sudden influx of interest is twofold. First, investors are beginning to realize that companies with solid ESG ratings outperform those without such ratings. A 2016 study from MSCI found that over ten years, companies with solid ESG ratings outperformed those without by 2.5%.

Second, investors are also beginning to see sustainable investing to positively impact the world while earning a financial return on their investment. This new breed of investor has come to be known as the “impact investor.” Impact investors seek to invest in companies with a positive social or environmental impact – even if those investments don’t necessarily generate the highest financial return.

The Case for Sustainable Investing as Effective Altruism

Many sustainable investments align with the Effective Altruism framework by focusing on neglected or overlooked issues. For example, many sustainable investments focus on addressing climate change, which traditional investors often neglect or overlook.

In addition, some sustainable investments also offer the potential for a more significant impact than other types of charitable giving. For instance, when you invest in a company that is working on developing new clean energy technology, you are not only fighting climate change but also helping to create the infrastructure for a more sustainable future.

However, it’s important to remember that not all sustainable investments are created equal. Some sustainably focused companies may have minimal impact, while others may do more harm than good. It is essential to do your research before making any investment – sustainable or otherwise. 

The Case Against Sustainable Investing as Effective Altruism

While many sustainable investments align with the goals of effective altruism, it’s important to remember that not all private sector solutions are necessarily effective or efficient. Some experts argue that personal sector involvement can hinder progress on social and environmental issues.

For example, some critics argue that carbon offsets – a type of sustainability-focused investment – are ineffective and possibly even harmful. Carbon offsets allow investors to offset their emissions by investing in projects that reduce emissions elsewhere. However, many carbon offsets fail to reduce emissions, and some even increase emissions.

Similarly, private sector involvement in public projects can often lead to cost overruns and delays (think the Big Dig in Boston). So, while private sector investment can be helpful, it’s essential to ensure that it’s done thoughtfully and considering potential negative impacts.

So does this new wave of sustainable investing mean that effective altruism is finally mainstream? Not necessarily. While sustainable investing is certainly a step in the right direction, some significant hurdles still need to be overcome before it can genuinely be considered effective altruism.

The first hurdle is that many sustainable investments are still made with the primary goal of generating financial returns. In other words, while these investments may have some positive environmental or social impact, they are not necessarily made solely for such an impact. Impact investors seek out companies that they believe have a positive social or environmental impact – even if they don’t necessarily offer the highest financial returns. In contrast, sustainable investors often choose investments based on their potential financial returns – even if those investments don’t have a significant positive impact.

The second hurdle is that many sustainable investments are still relatively small. For example, while there has been an increase in institutional investors considering sustainability when making investment decisions, around half are doing so – which leaves a large percentage not yet considering sustainability. Moreover, many individual investors interested in sustainability still wrestle with the idea of sacrifice – i.e., foregoing potential financial gain to make a difference. It’s one thing to invest $100 in a company that you believe is positively impacting society; it’s another thing altogether to invest $1 million. The former requires minimal sacrifice on behalf of the investor; the latter requires a significant amount of sacrifice. And until more people are willing to make that sacrifice, sustainable investing will remain nothing more than lip service.

Conclusion

There is no easy answer regarding whether sustainable investing is a form of effective altruism. On the one hand, many sustainable investments do focus on neglected or overlooked issues and offer the potential for a more significant impact than other forms of charitable giving. On the other hand, not all private sector solutions are effective or efficient, and some critics argue that private sector involvement can hinder progress on social and environmental issues.

Ultimately, whether you believe sustainable investing is a form of effective altruism depends on your definition of effectiveness and your opinion on the role of the private sector in public philanthropy.