Do you aspire to align your investments with your principles but are not sure where to start or what questions to ask? With the right strategy, you can help save the world and put your investment dollars where your mouth is. Welcome to 21st century socially responsible investing (SRI).
SRI is a term generally used to describe values-driven portfolios (see definition of terms below). As more people seek to use their money to make a difference, SRI has matured to the point that it can produce long-term financial returns that are competitive with conventional portfolios.
INVESTING WITH A CONSCIENCE MEETS INVESTING FOR PROFIT
SRI portfolios have often lagged behind their conventional counterparts, but as the popularity of SRI grows, so do opportunities. Investors now have a choice of domestic, foreign, and global mutual and exchange-traded funds; actively managed and index funds; single sector funds; and many more options.
The trend towards SRI investing shows no signs of slowing down. Total U.S. assets under professional management using SRI strategies grew from $8.7 trillion in 2016 to $12 trillion in 2018, reports the Forum for Sustainable and Responsible Investment. That represents 1 in every 4 dollars under professional management.
3 STRATEGIES EMERGE TO MEET INVESTOR GOALS
Values-aligned investing falls into three general categories. Although these terms are often used interchangeably, each aims for a different outcome:
1. Environmental, social, and governance (ESG) investing
An ESG strategy is a performance-driven approach. Environmental, social, and governance criteria are used to help determine the value of a company. Examples of these criteria are energy consumption, labor relations, and business ethics. Companies that engage in positive ESG practices are considered better potential investments than companies that don’t. The investor weighs ESG factors along with traditional investment approaches to generate the highest financial return.
2. Socially responsible investing (SRI)
An SRI strategy is principles-driven and seeks to eliminate or select investments based on ethical guidelines. A strong return is still the goal, but political, religious, and/or social beliefs screen final decisions. An investor may ban manufacturers of tobacco or firearms from the portfolio, for example, or actively choose companies with a commitment to green energy and workforce diversity.
3. Impact investing
Impact investing is a results-driven strategy with the primary goal of producing a positive impact in the world. A person may invest in a company, organization, or fund that furthers causes such as innovative medical treatments, clean energy generation, or business opportunities for impoverished entrepreneurs. Assets in impact investing have doubled since 2010, according to the Global Impact Investment Network. The strategy is particularly popular among millennials.
CAREFUL NAVIGATION CAN LEAD TO SATISFYING OUTCOMES
When trying to define SRI, we find it difficult to presume that we or any other advisor can completely and accurately define this term in a way that is consistent for and relevant to a client base as a whole. FJY clients know that we take our fiduciary responsibilities very seriously. Our investment philosophy focuses on finding the best possible investments for our clients and maximizing their risk-adjusted, after-tax returns, in the context of an asset allocation strategy. Yet we understand that for some clients, investment on the basis of certain values is a primary concern and objective.
Several factors lead FJY Financial to suggest that consulting a professional may be in order as you consider values-driven investing:
- The field is relatively new and existing data can be inconsistent. ESG information is often self-reported by a company, for example, and broadly accepted measurement standards aren’t in place. Many managers, including those of popular mutual fund and ETFs, have relatively short track records of SRI performance.
- Investment opportunities abound if you want to follow your heart, but quality and returns widely vary. Expenses tend to be higher due to extra research and screening efforts, negatively impacting relative investment returns.
- Values-driven investment need not be an all-or-nothing proposition. Your portfolio can accommodate several strategies depending on your financial and social goals. However, be mindful that building a fully diversified portfolio of exclusively SRI vehicles is still somewhat unrealistic.
- Everyone has their own definition of social responsibility and most managers will not have the ability to completely customize their screens based on your definition.
FJY can help you navigate the possibilities and put together a portfolio that furthers the causes you’re passionate about and moves you towards your financial goals.