Chapter 26: Doing Good with Money
James Farmer: “We do what we have to do so we can do what we want to do.”
– The Great Debaters (2007)
Most people want to make the world a better place, and one of the ways to do that is to put our money where our beliefs are. Our power as consumers—where we spend, what we buy—is one way to express our priorities. But there are others.
Charitable giving is the most direct and personal way to use money for causes you care about. Most of us know organizations that are important to us. But what if you want to support an issue and don’t know who does good work on it. Or you are asked to donate to a charity that you don’t know much about. Marketing materials are always full of touching anecdotes, but not all non-profit organizations are well run. And unfortunately there are also outright scams that try to exploit your generosity.
What about deducting contributions from your income to reduce your tax bill? Possibly. Charitable contributions are deductible if you itemize deductions on your tax return. [65a] You can also deduct donations to governments, for example your local police department. Make sure the organization qualifies by asking them or by checking the IRS’s database.
If you get something of value in return for your donation, that portion is not deductible. The charity needs to tell you the deductible amount. It is best to get a written acknowledgement for your tax records.
You can deduct the value of items you donate, such as used clothes, furniture, even cars. Figuring out that value can be tricky but there are pointers in the tax preparation programs and IRS instructions.
There are a bunch of things you cannot deduct: time you put in as a volunteer for a charity, raffle tickets, and political contributions, among others.
Do you want your investment dollars to support good business practices and avoid harmful products? Check out ESG investing, which tries to favor the stocks and bonds of “good” corporate citizens. ESG stands for environmental, social, and (corporate) governance. You’ll also hear terms like socially responsible investing, sustainable investing, and impact investing. These all kind of overlap.
The problem is defining what is “good.” What issues matter the most to you? People have different views on workplace practices, diversity, executive pay, carbon emissions, gambling, alcohol sales, weapons and firearms sales, nuclear energy, and fossil fuels, all of which can come under the ESG umbrella.
Likewise, investment companies have many ways of doing ESG investing. When picking securities, they might ask “How much ‘bad’ stuff does this company do that might hurt its stock price?” or “How much good is this company doing in the world?” or “How is this company treating their employees and customers?” The answers to these questions are not cut and dried. It is also often not obvious how they are translated into investment choices. When you look at who makes the cut, tech companies often get high marks. (Microsoft is #1 on many lists.)
Serious ESG investing takes a lot of work and adds risk. You need to research companies that fit with your priorities and beliefs. Or pay someone to do it for you. You could end up with just a few dozen to invest in, maybe concentrated in just a handful of industries. This is risky.
In the meantime, if you just want an ESG slant to your investment plan, don't abandon the principles from Chapter 14. Emphasize broad diversification (many securities in a fund) and low expense ratios. Here are some ESG funds you can use instead of regular index funds:
Warning: If you choose to invest in ESG funds, remember that “doing good” with your investments does not assure that your investments will do well.