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Life Kit: How ethical investing works

MICHEL MARTIN, HOST:

This is the time of year when a lot of people say they're going to focus on their finances, so we want to talk about so-called ethical investing. That's a way to put your money where your morals are, and it's taken off. A 2020 report found that one-third of all U.S. assets are now invested in companies that say they're operating in an ethical and environmentally sustainable way. But how do you know if your money is making the impact you really want? From NPR's Life Kit, Lauren Migaki breaks down how ethical investing works and if it might be right for you.

LAUREN MIGAKI, BYLINE: Financial planner and consultant Manisha Thakor says ethical investing is a lot like love.

MANISHA THAKOR: Everybody has sort of their own definition and take on it. And everyone feels they've landed on it at different points.

MIGAKI: Some folks may be looking for a focus on the environment, animal welfare or gender equality, whatever your cause may be. The idea that the money you invest can generate meaningful change and a profit is mostly referred to as ESG investing.

THAKOR: ESG stands for environmental, social and governance.

MIGAKI: And like love, there are no ESG soulmates here. But there are two main strategies for finding a good match. Option one - choose a mutual fund or exchange traded fund that goes super-specific on one issue.

THAKOR: Like the ETF SHE, S-H-E, where you are just focusing on issues around gender parity in the workplace.

MIGAKI: Or choose a fund that goes really broad, one where, generally speaking, the companies in the fund are doing some form of good. But you may not agree with all the choices the fund makes. It could include a fossil fuel company that's doing really well on diversity goals or a company whose ethics are in a gray area.

THAKOR: You know, is nuclear clean energy? Or is nuclear or not clean energy?

MIGAKI: And regardless of what you decide, Thakor says it's crucial to protect your investments by seeking out the right kinds of ESG funds.

THAKOR: The biggest red flags are fees.

MIGAKI: She says stick with fees of about half a percent. Otherwise, those fees add up over the course of decades, especially when we're talking about a retirement plan.

THAKOR: That's going to be the best place to start off because it's been vetted by your company while they're wearing a fiduciary hat.

MIGAKI: If your company doesn't currently offer this, Thakor says send an email to your human resources department. Express an interest in socially responsible investment options for your 401(k). Thakor expects that there will be many more ESG options in the near future, and she says the industry has changed a lot. When she first started 25 years ago, ethical investing was mostly about excluding just a few specific companies.

THAKOR: Groups would start saying, I want no sin stocks - no alcohol, no tobacco.

MIGAKI: To be clear, ethical investing isn't a cure-all. It cannot erase the very real harms done to the planet and society.

THAKOR: There are some people who say the whole idea of ethical investing is a farce. It's just something we've done to make ourselves feel better after we've ruined the planet.

MIGAKI: But Thakor feels less cynical. She says it's a win that the word ethical is even tied to business nowadays.

THAKOR: Over time, I believe that ESG will likely not even be a phrase in and of itself. It's just part of doing business. Of course you pay attention to these factors.

MIGAKI: And she says while we may not see immediate change, she's heartened to see that folks are at least trying to push that boulder up the hill. Lauren Migaki, NPR News.

MARTIN: Life Kit has so much more personal finance knowledge. If you're interested, go to npr.org/lifekit.

(SOUNDBITE OF THE O'JAYS SONG, "FOR THE LOVE OF MONEY") Transcript provided by NPR, Copyright NPR.

Lauren Migaki is a senior producer with NPR's education desk. She helps tell stories about teacher strikes, college access and a new high school for young men in Washington D.C. She also produces and hosts NPR's podcast about the Student Podcast Challenge.