1) Is it possible to invest in the United States Economy without also speeding the pace of environmental decline?
Yes, I think so. If I buy a stock or bond secondhand (i.e. not via an IPO), my money does not go back to the company to fund more palm oil plantations, coal power plants, or plastic bottle production lines. It goes to someone else, or a company of someone elses. If I take dividends, interest, or capital gains due to share buybacks from these companies, it does not enrich the companies. In contrast, I am literally taking their money away and giving them nothing in return. Each dividend I take or share buyback I profit from represents a reduction in the company's ability to grow.
2) I am aware that there are "socially responsible" indexes and funds...the majority of these funds strike me as very similar to the overall index in most cases with only slight edits to remove the very worst offenders when it comes to extractive industries and so on. In other words, if you remove Exxon but you are still investing in Apple, then you are still profiting off of (and enabling/encouraging) the masses to buy new phones every 20 minutes, thus destroying what little wilderness remains...right? Or am I missing something and are there funds/stocks/companies that are truly socially responsible when it comes to the environment and might actually be slowing/reversing the decline of wilderness?
I think it's complicated. Yes, big tech hardware requires all sorts of strip mining in various wildernesses and big data centers consume tons of electricity, but these things also allow me to work from home right now, which means I'm not driving a 3,000lb car to work, pumping several liters of pollution a second into the atmosphere. Additionally, my employer might foregoe the construction of a new office building because its employees can WFH, so my utility footprint just halved. After work, I can avoid driving from shopping center to shopping center looking for deals because Google and Amazon will do that for me. So is big tech carbon-heavy or carbon-negative, or is it about to swing another way? It's honestly hard to say.
Suppose more and more investors piled into socially responsible investments, to the point where similar rated bonds of polluting companies yielded 5% more than the bonds of "green" companies. How long would such an imbalance last until someone figured out they could get a 5% higher yield at the same level of risk by loaning to polluting companies? How many people would pass up the opportunity to retire young and wealthy? How many of the socially responsible investors could resist the temptation not to work until they're 70 for a principle? Funding will flow to the highest return at any given level of risk regardless, so might as well index.
3) Are there any creative solutions here? Ideally it would be awesome to resist / slow / reverse the decline that is taking place while also enjoying the benefits of Mustachianism / FIRE. However, I cannot escape a feeling that the externalisms of our putting millions into the US economy is just feeding the beast that will eventually destroy the world.
Companies do not clear cut forests, make millions of tons of plastic packaging, or pollute the air because investors are available. They make these ecology-destroying choices in response to demand from their customers. For example, if demand for airline flights went down 50%, but an investor frenzy drove American Airlines stock up 100% and their bond yields down to 2%, would there be more or fewer planes flying? Fewer of course. They aren't going to waste investors' money flying empty seats around, and if they did, more talented managers would soon be in charge. We can say the same thing about plastic future-trash, electricity generating stations, cars, McMansions, mylar balloons, cigarettes, etc. It's all driven by demand, not investment.
It has often been joked on this forum that the plan is to take money from the economy through work and investment, but to not put it back in through consumption, and if everybody did that the economy would collapse and the investment part of the plan would't work. The plan works as long as others over-consume while we under-consume. It's safe to say we can count on others to over-consume, which is bad for the planet. If we under-consume that is better for the planet regardless of what others do. If we can convince others to under-consume, as MMM is doing, that's a multiplied impact. MMM's blog is an example of a creative solutions. Letting all your over-consuming friends know when you retire at 40 or 45 is another. Under-consuming consists of thousands of creative solutions to life's little challenges, as many frugality blogs describe.
4) Is our best strategy to just continue to invest heavily in the S&P 500 and then hope for top-down change? Or are there ways for us to be more proactive about this?
I think so. Looking at one's levers of influence in order of power, there are:
a) Activism, organizing, and voting (extremely powerful)
b) Interpersonal influence (force multiplier)
c) Personal consumption decisions (limited)
d) Investing (essentially trying to create an economic arbitrage for others to exploit, pushing water uphill)
Viewed this way, spending $100 on activism/organizing has many times the impact of suffering $100 of investing underperformance due to paying a high expense ratio. The fund manager probably commutes across state lines in his 10 cylinder lambo anyway.
5) Are there things that I am missing and are there ways to put my mind at ease a bit about all of this?
This will not put your mind at ease: It is known that "socially responsible" investing will have zero effect on the world, and is only an exercise in self-exculpation. If one's stock/bond picking influences the price of an asset, that pricing imbalance will be arbitraged away by other investors or a supercomputer. The legacy of our most careful stock picking might be a blip on a chart that wouldn't be there otherwise, and that exists for a few seconds before being lost in the noise, and then that effect ends and is gone forever.
Perhaps if the socially responsible investor feels good about their behavior, they will consider their good deeds and conscientiousness as an offset for other behaviors, like buying fast food every once in a while, or driving a compact hybrid SUV instead of sedan, or not recycling as many of those goddamn plastic bags. Maybe as a socially conscientious investor, you deserve to turn the thermostat high in the winter instead of wearing clothes, and maybe you deserve a new cell phone.
Maybe they'll even brag on social media about going all-in on their socially responsible fund, causing their friends to think of environmentalism as a form of bragging within a certain clique.
What's really going on is that a person who cares about the environment has found a way to not feel bad about failing to help people organizing for change at the local level. They've found a way to avoid donating. They've found a way to call themselves an activist involved in a movement, when in fact they just bought another greenwashed product.