When I entered the investment industry in 1984, practically no one knew what it meant to invest in a socially responsible manner. With more than $760 billion now invested in European and US mutual funds and exchange-traded funds, SRI/ESG investing is no longer a fringe investment strategy. Today, individual investors are demanding to know more about the types of companies they hold in their portfolios and whether they are good corporate citizens—or not.
Increasingly our clients are asking many good questions about their investments and are expecting them to model their personal values. For these investors it is no longer satisfactory only to have a diversified portfolio and good performance. They want their investments to be having a positive impact.
Where does one start in sorting out the good vs. bad investments? Is it simply selling the “bad” companies? What constitutes a “bad” company to you? Are there other ways to affect positive change through your investments?
Socially responsible or sustainable investing starts with four principal areas:
Avoidance – This approach is the traditional socially responsible investing strategy. It has been around for decades. Avoidance involves looking at a group of stocks, say all of the stocks in the S&P 500 index, and then removing the “bad” companies from the list of potential investments. This approach commonly excluded companies in specific industries such as tobacco, firearms, nuclear weapons/power, gambling and pornography. It is a relatively simple strategy that relies on excluding securities. It does not touch companies that might be demonstrating leadership in positive areas.
Environmental, social & governance (ESG) - This approach involves investing in companies that are scored based on overall ESG ratings. For example, if a company is taking measurable steps to reduce its carbon footprint, demonstrating tangible involvement with the communities where it does business, and has implemented fair pay practices, it may receive high scores and be included in a portfolio. Portfolio managers of this strategy are taking an active approach to emphasize companies with high ESG scores. While the Avoidance approach above may focus on certain industries, the ESG approach is looking at individual companies for their overall impact in environmental, social, and corporate governance areas.
Thematic – This approach focuses on a particular E, S or G issue. A popular area today is carbon-free or renewable energy investments. This would fall under the “E” category. While it may seem similar to the Avoidance approach above, thematic strategies tend to focus on one specific area. If you have multiple priorities, you may find that a broader approach is more suitable than the thematic.
Impact – This approach targets non-financial outcomes along with financial returns. Many times impact investments are focused on a specific goal such as affordable housing in a certain town or region, women-owned businesses, education, or health care. Impact investing usually requires a metric so that progress towards stated goals can be measured. It is also common that impact investing requires a specific investment time commitment.
Determining the best approach requires careful thinking about what is most important to you. We recommend that you start this process by thinking about the causes that you care about and, if you currently donate money to charity, consider those causes to help you shape your socially responsible investment priorities.
Want help determining your socially responsible investing priorities? Give us a call. We’re here to help.
Lyman H. Jackson
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.