I’m unusual in my circle of friends because I like to talk about saving money for the future. I like to talk about what I’m doing to save for the future, and I like asking them what they’re doing.

How does a person typically save for their future?¹ The naive answer is “by putting money in a savings account.” That’s where most people start. My first bank account was a savings account. I didn’t even have a bank card. Just a little book in which every deposit was recorded by the teller.

Why do people put their money in a savings account? Above all, they do it because it is safe. In quiet times, banks don’t fail, and in modern times in developed economies, we’ve had government deposit insurance to protect bank balances up to a certain amount.

You put your money in the bank because it is safe, you put it in a savings account because that pays interest, and you save your money because you think you’ll have a future in which you’ll need it. So you expect that if you diligently pay into your savings account, the balance will grow, the interest will compound, and after many years you’ll have a nice nest egg.

Futures past and present

I’m a parent of a young child, and like many parents, I wonder how best to save for my child’s future. A long time ago (back in the 1970s and 80s) you did that using some pretty simple instruments. You opened a savings account for the child and paid into it regularly. Or perhaps, if you were a little more sophisticated, you bought some government bonds. Later, tax-sheltered education savings plans became available in some countries.

In the 1970s and 80s, interest rates were so high that these simple measures were delivering a healthy return, even when adjusted for inflation (in Canada, the central bank’s overnight lending rate peaked at 20.78% in August 1981, while inflation peaked at 12.9% in July 1981. That still left a healthy real interest rate of almost 8 percent.)

So in 1970, saving for your future meant, for many people, simply putting the money in a savings account and leaving it there for the next 40 years.

Fast-forward 40 years. Now it’s 2010. The financial crisis was two years ago. Central banks lowered interest rates to save the financial system from collapse, and when they couldn’t lower them any further, they started creating money out of nothing and buying government bonds with it (this is known as quantitative easing).

Lesson 1: The future people envisioned in the past doesn’t look anything like what actually transpired.

What’s acceptable changes

If your money is sitting in an account while not earning any interest, then it is effectively disappearing, because inflation (the process by which a unit of money declines in purchasing power over time) marches on.

But the financial crisis of 2008 and the quantitative easing that followed it and which continues to this day has depressed interest rates all over the world. The safe investments such as savings accounts, term deposits and bonds no longer return anywhere near what they did forty or even twenty years ago. It helps that inflation has been low as well, but even adjusted for inflation, we are experiencing negative interest rates in many countries.

And so many previously cautious savers are getting over their risk aversion and putting their money into the stock markets, because they see no other way to reach their financial goals. They are taking on more risk because they feel that have no choice.

For the risk-averse saver:

• In 1970, putting your money in the stock market was considered dangerously risky.
• In 2021, there is no alternative to putting your money in the stock market.

Lesson 2: What’s considered acceptable changes over time.

Index investing is the new conventional wisdom

Fans of the late Jack Bogle (the father of the modern index mutual fund and the founder of Vanguard) will tell you that investing doesn’t have to be complicated. Find a broadly-diversified, low-cost index mutual fund or exchange-traded fund, a similarly low-cost fixed-income fund, choose an asset allocation that fits your risk tolerance, buy and rebalance regularly, and hold forever. That’s the investment strategy, and it fits on a recipe card.

Today’s vision of the future, as informed by the past, says that anybody with the discipline to leave it at that will find themselves a very wealthy person in 40 years.

(Provided, of course, that the future develops the way the past has.)

I’ve long been an advocate of passive index investing because there is something fundamentally honest and elegant about the whole thing. The effect of broad diversification and cost control on long-term investment returns can be mathematically substantiated. And when Jack Bogle founded Vanguard, he did it partly because he felt he had moral duty to do it. He understood that retail investors were being misled and overcharged by their advisors and he wanted to offer them an alternative. He was ridiculed for it. (Nobody is laughing anymore. Today, the Vanguard group has over 7 trillion USD under its management.)

So passive index investing is simple, pragmatic, and real. Those are all good things.

What future are we saving for?

But if you’re trying to save and invest for your young children, as I am, and you’ve been paying attention, then you might also be thinking about what impact your investments have on people and the environment.

Why should anyone care about this?

Recall what I wrote above: you save your money because you think you will have a future in which you’ll need it.

When all you had to do was put your money in a savings account to build wealth, you didn’t have to think about the impact that your savings were having. What if how you invest your money threatens the future you thought you were saving and investing for?

He’s exaggerating, you might be thinking. Could it really be that bad?

What you get when you invest in an index fund

Take Vanguard Canada’s Balanced Portfolio ETF (ISIN: CA92207E1079) for example. This fund is any passive investor’s dream. It has a Management Expense Ratio (MER) of 0.24 %. For that low, low price, you get a fund that has a 60/40 stocks to fixed-income ratio with automatic rebalancing and dividend reinvestment. It’s ridiculously broad, containing 13,210 stocks across developed and emerging markets.

Let’s look under VBAL’s hood.

Climate

If you are climate conscious, you’ll want a fund that is low on carbon-intensive businesses, the most obvious examples being oil, gas and coal businesses.

VBAL is amply equipped with oil and gas companies, including some of the world’s biggest polluters. Suncor Energy and Imperial Oil are the two largest partners in the Syncrude tar sands, which feature the largest tailings dam in the world, the Mildred Lake Settling Basin.

	Holding Name	% of Market Value
32	Suncor Energy Inc.	0.22572
65	Exxon Mobil Corp.	0.12675
90	Chevron Corp.	0.10265
113	Cenovus Energy Inc.	0.08370
202	Imperial Oil Ltd.	0.04736
210	BP plc	0.04526

Weapons

We’ve got bombers, ballistic missiles, and bombs:

Defense

	Holding Name	% of Market Value
205	Lockheed Martin Corp.	0.04667
2961	Aerojet Rocketdyne Holdings Inc.	0.00171
2373	Rheinmetall AG	0.00239

Aerospace

Some sneaky participants like to hide in other sectors. Our friends at Raytheon would be happy to sell you some cruise missiles or drones:

	Holding Name	% of Market Value
136	Raytheon Technologies Corp.	0.07052

Mining and minerals

BHP is a part owner of the Germano mine complex in Brazil, whose tailings dam burst in 2015, killing 19 people and contaminating the Rio Doce river so severely that it destroyed all life in the river.

Teck Resources has a long list of environmental violations, including contamination of the Columbia River through its mining operations.

The Norwegian sovereign wealth fund divested itself of its holdings in Rio Tinto plc due to the “unacceptable risk of contributing to grossly unethical conduct.”

	Holding Name	% of Market Value
112	Teck Resources Ltd. Class B	0.08376
179	BHP Group Ltd.	0.05459
214	Rio Tinto plc	0.04466

Tobacco

Got a light?

	Holding Name	% of Market Value
108	Philip Morris International Inc.	0.08816
190	Altria Group Inc.	0.05106
200	British American Tobacco plc	0.04749
841	Imperial Brands plc	0.01103

Where do we go from here?

A couple of things to note: This fund is not an ESG-labelled fund. The companies I listed above are just a selection out of all the companies in their categories held by this particular ETF, but I selected the worst, best known offenders for the sake of readability and to make a point.

This post began as an idea to evaluate the securities in the most popular, broadly-diversified index exchange-traded funds against some rough criteria for environmental performance, social responsibility, and governance, the three components of the abbreviation ESG.

I quickly discovered how naive I’d been.

In just a couple of weeks, I’ve learned:

• Even the “best” socially responsible funds make tradeoffs. Everybody’s got dirty hands.
• The most innocent of intentions can have the direst of consequences.
• To be a better person and contribute to real positive change, you have to look at the totality of your activity and determine, to the best of your ability, whether it is a net benefit to the world. That is hard to do. But it is worth striving for.
• Doing good is decided as much by what you don’t do as what you do.
• If you want to have a measurable, positive impact through your investments, you cannot rely on fund managers to do it for you. You have to get creative.

So, in the coming weeks, that’s what I will be writing about: how you can live and work to maximize positive impact while also achieving your own goals. I’ll look at effective altruism and how its principles can be applied to investing; short-selling and impact investing; the psychology and impact of tithing; the practical meaning of diversification, and finally how betting on green technologies might be a risk worth taking. ⊡

(DISCLAIMER: I am not a financial advisor. This is not financial advice.)