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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode continues our nerdy deep dive into the broad effects of climate change on personal finances, with a focus on how to make your banking and investing choices reflect your climate goals.
Check out this episode on either of these platforms:
Impact investing, socially responsible banking, sustainable investing, values-based banking, ESG … all of these terms can make it seem like environmentally conscious investing and banking are better left to the experts. How can someone who wants to use their money to make a difference navigate this?
On the third installment of our nerdy deep dive into the intersections of climate change and personal finance, NerdWallet insurance editor Caitlin Constantine is joined by banking Nerd Spencer Tierney and investing Nerd Alana Benson, both of whom spend a lot of time reporting on the topics of socially responsible banking and investing. In this episode, the Nerds cut through the jargon and demystify the concepts so listeners can better understand how to make their money work in ways that are aligned with their values.
But even the most well-intentioned consumers can be misled by greenwashing, which is the term used to refer to a company’s exaggerated or misrepresented claims about the environmental sustainability of its business practices. The Nerds explain what this looks like when it comes to banking and investing and how to avoid falling for it, which can help consumers be better informed about how their money is actually being used.
More about socially responsible investing and banking on NerdWallet:
Sean Pyles: Sometimes it can be hard to think about what you as an individual can do to minimize the threat of climate change. Sure, be a good global citizen, avoid fossil fuels, use less water. But you know what really talks the talk? Your money.
Spencer Tierney: We have to be honest with ourselves that our individual impact isn't going to change the world on its own. It's really going to be a group effort to create systemic solutions to climate change. And the more people who choose a bank based on its sustainable focus, the more of a hold sustainability will have in the banking industry.
Sean Pyles: Welcome to the NerdWallet Smart Money podcast. I'm Sean Pyles.
Caitlin Constantine: And I'm Caitlin Constantine.
Sean Pyles: We're back with the third episode of our nerdy deep dive into the broad effects of climate change on our financial lives. Caitlin, as I said at the top of the show, sometimes it feels like climate change is so overwhelming that what can I really do as a single human being to save the planet?
Caitlin Constantine: Totally. I feel like that all the time. But as you also said, money talks. If you have money, there are choices that you can make about what you do with that money, like where it goes and how you use it. And what you do can speak volumes to, for example, the people who make environmental policy.
Sean Pyles: Like politicians?
Caitlin Constantine: Sure. But even beyond that. You can tell corporations and banks and investment houses what your priorities are by where you park your money and how you choose to invest it.
Sean Pyles: OK. So really making my money talk for me.
Caitlin Constantine: Exactly. So we're going to review some of the jargony stuff that no doubt a lot of our listeners hear all the time. We're talking stuff like ESG, sustainable banking, and then we'll try to make sense of all of it and give some advice for how to make a difference using your dollars.
Sean Pyles: All right, we want to hear what you think, too, listener. To share your ideas, concerns, solutions around climate change and finance with us, leave us a voicemail or text the Nerd hotline at 901-730-6373. That's 901-730-NERD. Or email a voice memo to [email protected].
Caitlin Constantine: All right, so I'm joined today by two, count them, two Nerds who have done a lot of thinking and reporting about these issues. Spencer Tierney is back with us. You heard from him on the first episode of this series when he gave us this great broad outline of where climate change shows up in our financial lives. And he covers consumer banking here at NerdWallet. And then Alana Benson writes about investing, especially socially responsible investing. Thank you both for joining us on Smart Money.
Spencer Tierney: Yeah, glad to be here.
Alana Benson: Thanks for having us.
Caitlin Constantine: All right. So let's start with some definitions for folks who might wonder what the difference is between, say, impact investing, socially responsible investing, ethical investing, ESG. Help us make it make sense.
Alana Benson: Sure. So most of those terms are just general terms that don't have a particular meaning or definition, whether it's socially responsible investing, ethical investing, impact investing, whatever your term is. Typically, that just means investing with your values. And there's not necessarily a hard and fast definition for exactly what rules or anything that those investments have to follow. So the one exception to that is ESG, which stands for environmental, social and corporate governance criteria. And these are just a set of factors that investors can use to evaluate investments in each of those categories. So for example, a green energy company might score really well in the E or environmental category, but if they treat their employees poorly, then they may score low in the S or the social category.
Caitlin Constantine: Spencer, is there any difference here between investing and banking? I know that I've seen references to socially responsible banking, ethical banking, values-based banking, mission-driven banking, sustainable banking. Are the definitions the same across the board?
Spencer Tierney: The traditional business model for a bank works like this, and it's relevant, bear with me. Banks use the money in your checking and savings accounts to make loans to businesses and home buyers and others, and then makes money off of those loans. Fighting climate change comes into play if, say, a big corporate bank uses customers' funds to lend to fossil fuel or deforestation projects, and you as a customer aren't happy about that. And you're not directly responsible for that environmental impact, but you're still part of that system that's not as good for the planet. And I keep on mentioning banks; I will be mentioning credit unions and neobanks as well that can have certifications and help fight climate change.
Getting into the terms we're using, ethical banking, social responsible banking and values-based banking to name the few that you mentioned, they don't have legal definitions, but they mostly all describe a bank or credit union or neobank with a serious commitment to social and environmental causes. And they get third-party certifications to prove it. Sustainable banking, the last term that was mentioned, it's a similar term with a lot of overlap, but it can have a slightly more environmental bend, so I'll use that term going forward.
Caitlin Constantine: OK. So what are some of the reasons why we should be looking into this kind of banking and investing? What's the point? What does it do?
Alana Benson: So for a lot of people, it's something that can just make them feel better about their choices. In some ways, we're all at the mercy of these bigger companies, but investing sustainably gives people a sense of control. And in its own small way, it can help push industries toward more sustainable solutions.
Spencer Tierney: We have to be honest with ourselves that our individual impact isn't going to change the world on its own. It's really going to be a group effort to create systemic solutions to climate change. And the more people who choose a bank based on its sustainable focus, whether that's lending to more clean energy projects in the community or by directly offering electric vehicle loans or solar loans, the more of a hold sustainability will have in the banking industry.
Caitlin Constantine: OK. So what are some ways to do this in our bank accounts, in our investments? How do we go about actually doing this?
Spencer Tierney: So generally on the banking side of things, you have to be able to join a sustainable banking institution. So whether that's a bank, credit union or neobank, and in my research, the sustainable banks tend to have legitimate third-party certification for accountability. The two most rigorous designations are becoming a B Corp bank and joining the Global Alliance for Banking on Values. Both of these require transparency into company practices and commitments to social and environmental impacts. Other eco-friendly certifications are Fossil Free Certified, Green America Certified and 1% for the Planet. But the caveat here is that there are very few in the U.S., maybe 10 to 20 banks per certification, last time I checked. And some of these banks have a combination of them. So both being B Corp and Fossil Free Certified, for example.
Caitlin Constantine: When you said 10 to 20 banks per certification, about how many banks are there in the United States, just to kind of give us a sense of what this profession looks like?
Spencer Tierney: Yeah, that's a great question. I'd say offhand 5,000 banks, 5,000 credit unions. So we're here talking about a very small number and the total that have certifications, I'm going to probably estimate less than a hundred. So yeah, very small number. A lot of banks may still be community forward and community based, and that happens with community development financial institutions, or CDFIs, which include banks and credit unions that are certified by a U.S. Treasury program to provide accessible banking services to underserved communities. CDFIs are mission driven, but more social than environmental causes. But also, they aren't the big fossil fuel lenders in the U.S., so I don't want us to limit to just these specific certifications. CDFI is definitely another good option.
Caitlin Constantine: OK. Alana, how about you?
Alana Benson: One thing that you can do is look for investments with strong ESG scores. So this can give you an indication of how well they perform in each of those ESG categories. And one great tactic is investing in industry specific areas. So if you're concerned about climate change, you can avoid investments in fossil fuels, sure. But you can also put your money into green energy technologies, and this way you're actually funding companies that are helping move the industry away from fossil fuels.
Caitlin Constantine: And can you tell us a little bit about how somebody who is new to this whole subject, where can they go to find out what their investments' ESG scores are?
Alana Benson: That is something that gets a little tricky. There is a company called Sustainalytics, and they're great. You can put in a company's name, and it can kind of spit out an ESG score for you. And a lot of different investments, so maybe you're looking at a stock or a fund, if you go into a lot of stock screeners, they now have ESG information right in the screener. So these screeners, they exist independently, but they're also a part of a lot of brokerage accounts. So if you already have an investment account, you could probably just look up the investment within that brokerage account's search function and there's probably a little tab with ESG information on it. So this is super helpful, and this is something that the industry has changed in the last few years. It's pretty new, but there should be some information out there.
Caitlin Constantine: How do you know that your bank or investments are really doing the job here when it comes to sustainability?
Alana Benson: So even though the industry, like I said, has moved forward and this information is more widely available than ever, it is still really hard to know how your investments are doing in terms of sustainability. And that's because the ESG industry hasn't done the best job at making things super clear for consumers. So there are several different companies that provide ESG scores, and how they score varies depending on the company. And so I like to look into an individual company's track record. I look at what kind of climate initiatives they've taken on in the last few years, and I look at how they've followed up on those promises. A lot of companies now publish ESG reports, which makes this a lot easier. But I even look up companies on Glassdoor and I see what their employees are saying. If the employees are really happy, that's a pretty good indicator.
If you don't want to be as hands-on with the research, you can look for funds that are tagged with ESG, like I said, but just know they may look pretty similar to other traditional funds and invest in many of the same companies. And this is because a lot of companies that score well in the ESG realm are tech companies, which are heavily featured in most traditional funds these days. So you might still see Amazon in there if you look under the cover of a lot of these ESG funds. It's not going to be that you pull back the layer and every single company is a B Corp or something like that.
Caitlin Constantine: So that could lead us into the next topic of conversation, which is greenwashing. We hear a lot about greenwashing in corporate America. So how do you avoid that here, especially when it comes to climate-related issues? And also, before we get into that, maybe one of you could give us a definition of greenwashing for any listeners who may not be familiar with this concept.
Spencer Tierney: Sure. Greenwashing is when a company misrepresents or exaggerates its claim about being sustainable, whether that's in annual reports, advertisements or any other public-facing materials.
Caitlin Constantine: OK, so let's take these one at a time. Spencer, let's start with you. What does greenwashing look like in banking?
Spencer Tierney: If a bank is committed to climate action, whether in a statement, annual report, however it presents itself, then that should mean two things. It's making no new investments in fossil fuels, and it's currently investing in climate solutions such as clean energy. So not doing one of those two things can be looked at as greenwashing.
Caitlin Constantine: And Alana, how about when it comes to investing?
Alana Benson: So a good example of this is a fund may just put green or sustainable in the name of their fund without actually having to change anything about it. Sometimes these funds charge more, so you should always look into a fund's fees like its expense ratio. And like I said, look at those holdings. When I say the holdings of a fund, it's just the actual investments that the fund is in. So a fund is just a basket of investments such as stocks. And when we say its holdings, we typically talk about the top 10 biggest percentages of the stocks that it holds. So if you've got a green fund and then you look under the covers, and again, it might really invest heavily in Amazon, it might invest heavily in Microsoft or it might invest heavily in fossil fuels. And so you need to investigate a fund's methodology and see how it selected the investments. If a fund receives a high ESG score, that's a better sign than just having sustainable in the name or some other signal like that.
Caitlin Constantine: So Spencer, do you have any examples of banks that are doing this? Do you want to call anyone out?
Spencer Tierney: I do, actually. Based on my research, I've seen four signs of greenwashing at banks, so buckle up. First, vague language in a bank's impact report can be a sign. So the biggest four U.S. banks tend to use vague verbs such as mobilized, deployed or facilitated, financing billions in clean energy or other climate-friendly projects. But hold up, what does that mean? Do they actually do the lending? Do they oversee it? It's unclear. Second, if a U.S. bank is on the annual Fossil Fuel Finance Report, which is created by the nonprofit Rainforest Action Network and the Sierra Club, that can be a red flag. Quick disclaimer, Chase, Bank of America, Citibank and Wells Fargo are NerdWallet partners, but that doesn't affect the way we talk about them. The four biggest U.S. banks, so the four I just mentioned, Chase, Bank of America, Citibank and Wells Fargo, are all up on this list, putting tens of billions into oil or gas projects every year. They may support low carbon futures and have 2030 emission reduction targets, but they're still not the most eco-friendly.
Third, lacking third-party certifications or using them to appear more green. So Bank of the West is an example of a bank with the 1% for the Planet certification, but it is owned by a parent bank that finances billions in fossil fuels annually.
And fourth, any easy feel-good tactics can also be a sign of greenwashing. Quick disclaimer before I go on. Aspiration is a NerdWallet partner, but that doesn't affect the way we talk about them. So the nonprofit ProPublica did a report on the neobank Aspiration, and one of the neobank’s claims in 2021 was its debit card let you "reforest while you shop." But Aspiration counted trees not yet planted in its total tally.
Caitlin Constantine: What? How do they do that? How do they get away with that?
Spencer Tierney: Yeah, their justification, it made a little bit of sense, but it was still kind of like a little bit messy. Essentially, they're counting the trees that they have planned to plant as part of that total number because trees take time to plant. And basically they wanted to have all the numbers for all their initiatives already up there in their count.
Caitlin Constantine: OK. All right. More evidence said it's important to really take a close look at the banks and investments that you're working with.
Spencer Tierney: Yes. It can be complicated. And speaking of complexity, there is one gray area that I want to touch on. So carbon offsets should be more of a last resort than a first defense for a company to use. One thing about climate, so carbon offsets can take the form of planting trees, so a company can buy their way into calling themselves carbon-neutral. And it's not clear how exactly this type of accounting is really beneficial. We're talking about emissions created now versus planting trees that will take many years to actually be able to take carbon dioxide outside the atmosphere, but it is something to consider.
Caitlin Constantine: OK. And Alana, how about you? Do you have any examples of this related to investing?
Alana Benson: Yeah. Well, I do want to touch on one thing that Spencer brought up first, is something that he and I have talked about separately, is that yes, greenwashing is obviously a problem because it presents untruths in the industry. But at the same time, if a card, like the Aspiration card, is planting trees at all, that is definitely better than a card that's not planting any trees. And I think that that brings a really important thing into this conversation — that this industry is new, this industry is not perfect, and there will be things along the way that have glaring issues and are problematic, but we have to take ourselves out of the equation and ask, is this problematic as it may be net better than the other options that we have? And so I think it's just an important thing to keep in mind as we're discussing all of this that imperfect is better than nothing.
Caitlin Constantine: Yeah, that's actually been a theme throughout this series that progress is better than perfection.
Spencer Tierney: And one thing I want to add is also I think greenwashing is that spectrum. And I think if we're talking about a huge fossil fuel lender, that's going to be a lot more impact on the environment than say more of a fintech like Aspiration with carbon offsets. And I think that's something where even considering our own impact every day, thinking about energy usage, always like weigh, are we spending too much effort on something small? Are we focusing on the bigger things?
Caitlin Constantine: That all makes a lot of sense. I'm glad that you both pointed that out. Alana, even with all of those caveats, do you have any examples of greenwashing in the investing sphere that you can share with us today?
Alana Benson: There are lots, but one of the best is an example when BP, the oil company, installed a whole bunch of solar panels on their gas station roofs. And this was a pretty obvious attempt to make them look more green and eco-friendly despite the fact that more than 96% of BP's annual expenditures were on oil and gas. So in that way, putting solar panels on gas station roofs is the tiniest Band-Aid solution to offsetting carbon emissions from an oil company. But one of the companies I would like to mention is As You Sow, and that's S-O-W as in sow seeds, not S-E-W like sewing fabric, and this is a nonprofit that's a great resource for investors. They have a tool that analyzes the climate impact of mutual funds, ETFs and 401(k) plans. And so you can put in your 401(k) plan if it's registered with the company, and it can tell you the climate impact it has. So that's a really powerful tool.
Caitlin Constantine: So let's continue to talk a little bit more about how people can measure their impact when they make a decision to either put their money in a sustainable bank or to make sustainable or ethical investments. Is it at all possible to say, "Hey, if I invest this number of dollars, I can save 10 polar bears? Or if I move my money to this bank, it's like taking a thousand cars off the road." Is it possible to think of this in concrete terms like that?
Alana Benson: Gosh, the saving the polar bears number is something that I have longed for for many years, but basically no, it does not exist. It's really, really difficult to measure in a concrete way what your impact is. And I'm hoping that this will change as the industry grows because people want to know what their impact is. It makes you feel really good to have some kind of number or gauge on that.
Spencer Tierney: On the banking side, if you have a savings account or a CD where you'd have a lot more deposits than, say, a checking account at a sustainable bank and that bank is transparent about what clean energy solutions it supports, I mean, that's what's going to matter. I think to Alana's point about not being able to be number focused in this particular context, it's a bummer a little bit, but I think it's just going to be what it is. Trying to calculate our impact, it gets really tricky. So try to think big picture about what you want to support and what you care about.
Caitlin Constantine: OK. I also want to touch on some of the politics around this issue. So there's been some relatively recent pushback against this idea of responsible investing. Conservatives have said that concepts like ESG don't deliver enough to shareholders. Do one of you want to tackle that?
Alana Benson: Yeah, so there was a lot about ESG investments in the news lately. A lot of that surrounded being included in retirement plans, and there was a lot of bad press about it. So I just want to clarify a couple of things. So under the legislation as it currently stands, ESG investments are allowed to be considered for inclusion in retirement plans like 401(k)s. That does not mean that they will be forced into your portfolio. Your investment manager has a duty to provide you with the best investments for you. It's called a fiduciary duty. So if the best investments for you aren't ESG investments, then your fund manager won't invest in them.
But the other big thing is that ESG investments do have a track record of performing well, but they, like every other investment, have had times of poor performance. The Republican argument is that they don't perform well and thus should not be included in retirement investment portfolios. But with that line of thinking, should every sector like oil, for instance, be excluded from even being considered for retirement plans when it has a bad year? So in my mind, financial advisors should be the ones deciding what goes in or stays out of their clients' retirement plans and not politicians.
Caitlin Constantine: So to wrap up, how about we have each of you give our listeners a couple of basic easy steps to take if they want to make responsible banking or investing part of their efforts to help solve climate change? Alana, let's start with you.
Alana Benson: First, sustainable, socially responsible investing, whatever you want to call them, they're general terms. ESG has particular tenets about environmental, social and corporate governance and can help you really decipher what's happening within your investments. Two, if you want to get into sustainable investing, you can explore ESG funds. They're a really easy way to get a whole bunch of investments at one place. They're nice and diversified, and they do a lot of the research for you so you don't have to. And three, remember that every little bit helps. Don't get discouraged by how big the problems in the world feel. Maybe your individual dollars won't make huge change, but the choices you make about where you invest your money send a very loud message.
Caitlin Constantine: All right. And how about in banking, Spencer?
Spencer Tierney: Sure. I have three as well. One, when finding a sustainable banking institution, look for specific certifications, examples of projects that support its general environmental impact. Not every bank's going to have an impact statement, but try to find on their bank website if maybe they do. And then some specifics to look out for, maybe the B Corp logo on its website or being part of the Global Alliance for Banking on Values, a CDFI, seeing if they have any mention of having an impact where maybe over 70% of its loans stayed in the community or maybe it offers solar loans. So there are a lot of different components here. I don't want to limit us to just one or two certifications, and we have articles with lists of banks that fit this bill. So going local is totally part of your equation to consider here.
Two, as far as greenwashing, I think one of the biggest things to do is check the Fossil Fuel Finance Report or also any vague language in impact statements. And really don't take a bank just at its word, you're looking for third-party certifications because those have a consistent, oh, this organization that has certifications is looking across the industry. We're not relying on one bank's definition of being eco-friendly. I think that's an important part of creating a standard and really looking across the industry.
And third, this is a big ask. I mean, unlike investments where you might have a brokerage account and you'll be able to invest differently and you don't have to move to different accounts to really consider different investments, a bank account is just holding your cash, and the big ask of switching banks, well, it's inconvenient, and you might not be able to do it right now, but maybe you can have an extra savings account elsewhere, looking at a credit union locally or a B Corp bank. And it is just going to be one of the more effective ways to have your deposits send a message to the banking industry that you do want your deposits to fight for climate change.
Caitlin Constantine: All right. Well, thank you so much for sharing all of this amazing information with our audience today. We really appreciate you, Alana and Spencer, joining us on the podcast.
Alana Benson: Thanks for having us.
Spencer Tierney: Thanks for having us.
Caitlin Constantine: Sean, I feel like I have a bit more of a hold on the whole investing and banking word salad thing, but gosh, I still wish somebody would just pick a term and stick with it.
Sean Pyles: Same. Could we get them all together and choose one thing to make it a little bit less confusing for all of us? But that was a master class in how we can be better stewards of the planet just by making some fairly simple decisions about where and how to park our money.
Caitlin Constantine: Yes. So I came away from my conversation with Spencer and Alana feeling like I actually have a much better understanding about how to align my investments and my banking choices with my values, especially as it relates to the environment. I mean, this can all feel pretty opaque to somebody who doesn't have a lot of understanding about how it all works. And I now feel like I have a better sense of what to look for when evaluating banks and investments.
Sean Pyles: For sure. And I also really liked Alana's point about not letting perfect be the enemy of the good when it comes to climate-friendly initiatives from companies. I'll admit that when the ProPublica report about Aspiration came out, I was pretty outraged at first, but hey, at least they are planting some trees, right? We've got to take our wins where we can get them while also holding companies accountable. So Caitlin, tell us what's coming up on the final episode of the series.
Caitlin Constantine: So we're going to talk about the thing that nobody ever wants to think is going to happen to them, and that's disasters, specifically natural disasters, but we can also be talking about man-made disasters, too. Think about the train derailment in East Palestine, Ohio, that happened back in February. So you can never assume that you're immune from something like that or from a fire or a flood. And really the time to prepare is before something happens.
Kate Bulger: Turn on your video and your camera on your phone and start walking around your house. So go through every room, go around the outside, try and take pictures of everything, open every drawer, open every closet. Those images, those pictures that you get are invaluable after a disaster.
Sean Pyles: For now, that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected]. Visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate and review us wherever you're getting this podcast. This episode was produced by Tess Vigeland and Caitlin Constantine. I helped with editing. Sara Clarke and Pamela de la Fuente helped with fact-checking. Kaely Monahan mixed our audio. And a big thank-you to the folks on the NerdWallet copy desk for all their help.
Caitlin Constantine: And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes, and it may not apply to your specific circumstances. And with that said, until next time, turn to the Nerds.