In the last debate between Democratic presidential candidates, moderators challenged billionaire Tom Steyer on his commitment to combating climate change. Steyer made his fortune in the hedge-fund industry by investing in fossil fuel businesses among other things. He said this was before he fully understood the challenge posed by climate change and has since divested of all such investments. By way of explanation, Steyer said his businesses invested widely in all sectors of the economy, including fossil fuels.

Not all investors are billionaires who can launch self-funded campaigns for the presidency, but the point Steyer made actually can apply to almost anyone who invests in public markets: divesting entirely from fossil fuel companies is rather challenging when you hold a diversified portfolio. 

The demand for ethical investment choices is as old as the modern stock market itself. When shares in public companies first began to trade in the 18th century, Quaker endowments confronted the discomfiting fact that some of their investments might be profiting from the slave trade. This realization led to an early divestment campaign. Institutional investors like pension funds and endowments have long included ethical factors in their investment decisions. This has often been a response to prodding by activists and students, most famously during the campaign against apartheid in South Africa. Individual investors have generally not faced such pressure, though some of our clients with politically aware children would beg to differ.

We do not believe consumer or investor choices alone can deliver structural change. Yet where we invest is a window into how we think about the impact of our investments, or whether we’ve thought about it at all. As investment professionals focused on socially responsible investing, we speak daily with families who want their investments aligned with their values. Our clients have varying motivations for engaging us. Many are concerned about the environment, war, human rights, gun violence and worker’s rights. While seeking to avoid investing in companies that profit from destructive practices, we simultaneously seek investments in sustainable companies (a process called positive screening).

In recent years, millions of Americans have begun to examine their investment decisions with a moral/ethical lens. Few are as outspoken about economic morality, or have as large a platform as the leading candidates for the Democratic nomination. We decided to put the two progressive candidates (Bernie Sanders and Elizabeth Warren) to the test by evaluating their investment portfolios against their rhetoric. 

Our analysis makes it clear that even well-informed investors with access to the best information have a tough time incorporating their values into their portfolios. For years now, Senator Warren has criticized the CEOs of both J.P. Morgan and Facebook. Yet, by our estimate, Senator Warren and her husband have approximately $50,000 invested in each company’s shares. This would almost certainly come as a surprise to Senator Warren, as it would to most Americans with conventional portfolios.

To calculate this number, we used self-reported, 2018 senate asset disclosure forms for Senators Bernie Sanders and Elizabeth Warren. Since candidates are only required to report broad ranges for the value of their investments, our analysis has to be limited to these ranges as well.

Both candidates hold substantial amount of cash, so let’s start there. Sanders has publicly chastised America’s largest banks with some regularity, and his banking relationships reflect that criticism. He banks with the Senate Federal Credit Union and two community banks. If you are concerned about the outsized power that very large banks wield, you would do well to follow his lead and switch to a credit union or community bank.

Senator Warren’s banking choices are rather inexplicable. She has been trenchant in her criticism of the largest American banks (notably, she had a very public spat with J.P. Morgan’s CEO Jaimie Dimon last month). Warren has publicly and legislatively supported community banks. In a banking proposal her campaign unveiled this summer, she envisions a partnership between community banks and the postal service to deliver low-cost banking services to underbanked communities. Despite several good community banking options in both Massachusetts and DC, Senator Warren seems to have chosen to patronize larger banks, including two behemoths, Capital One and Bank of America. 

Senator Warren’s investment portfolio looks very much like that of a former educator. She holds a number of broad-based, low-cost index funds, many of them at TIAA-CREF, an investment firm that has had a long partnership with colleges and schools. These are cost-effective saving and investment vehicles. However, broad index funds incorporate virtually every industry in the economy including arms manufacturers, polluters and companies which have worked to undermine unionization efforts. These holdings are at odds with Warren’s political positions. 

Throughout the campaign, Senator Warren has presented a robust climate change policy. Yet, over 4% of her stock portfolio is invested in the oil and gas industry, including approximately $40,000 in Exxon Mobil.

Bernie and Jane Sanders’ investment portfolio consists largely of mutual funds. In common with Sen. Warren and her husband, Jane Sanders has several investments with TIAA-CREF. This is an unremarkable coincidence given their work as educators. 

The Sanders have begun to take the first steps towards ethical investing since their holdings include a socially responsible mutual fund. The couple appear to be familiar with how SRI fund managers push companies to adopt more responsible practices. By seeking out socially responsible investments, they demonstrate greater awareness than most Americans. Yet their portfolios still contain numerous investments they would doubtless find objectionable.

The moral or ethical questions surrounding business activities can get obscured when considering a small investment in a large multi-national corporation with dozens of operations in several countries. Mutual funds often contain hundreds of individual investments, creating an even greater challenge for investors who seek to implement a social responsibility mandate. Like most investors in mutual funds, the Sanders don’t appear to have fully investigated what their mutual funds are invested in. For example, Bernie Sanders has sparred with Bill Gates over taxes and the outsized influence billionaires have on US politics. Yet, the Sanders single biggest stock holding is Microsoft, entirely via mutual funds. Despite Senator Sanders best intentions, and even though they invest in a socially responsible fund, his investments do not seem to fully align with the Senators’ values.

Since many companies do not accurately report on social/ethical criteria, implementing a SRI mandate becomes an insurmountable challenge for most individual investors. Most investment professionals in the industry have no experience in socially responsible investing. Many will cavalierly dismiss ethical criteria by making unfounded claims that ethical portfolios negatively impact performance.

In fact, SRI helps reduce economic risk in a portfolio. Unsustainable and exploitative business practices create significant risk of fines and accrue unaccounted liabilities. The example of tobacco companies is instructive, and we would suggest that fossil fuel investors may soon face a similar situation as governments and communities across the world seek to recoup the costs of climate change from the most culpable and largest actors.

Broader adoption of ethical criteria by investors on its own is insufficient to reverse systematic trends like climate change, wars and runaway inequality. It does, however, have an impact. If, for example, we wish to see meaningful policy action on climate change, investors have to speak up, with both their voices and their dollars. Separating our investments from other spheres of our lives simply perpetuates the status quo.

What then should families who wish to incorporate ethical criteria into their investment process do? The first step would be to engage an investment professional with extensive experience in the area. Our firm has 15 years of experience advising families on how best to incorporate their values into their investments. When done with care and diligence, ethical investing can reduce both economic and idiosyncratic risk and help improve portfolio performance.