Investing with a purpose. Aligning your money with your values. Investing your conscience. Funding change.These concepts all fall under the larger umbrella of socially responsible investing. The premise is that you evaluate investments from a broader lens than just financial. While this is not a new style, it is growing in popularity. Today, investors are increasingly interested in aligning their investment strategy with their values.
A couple of studies released in June show a growing interest in this concept of using investment dollars to facilitate change. An Oppenheimer study titled “The Generations Project” found millennials are more likely to incorporate environmental, social and governance standards into their investment decisions, with 37 percent responding favorably, compared with only 21 percent of the silent generation (those born from 1925 to 1945). A Fidelity Charitable survey titled “Impact Investing: At a Tipping Point?” found more than 70 percent of millennials have made an impact investment versus just 30 percent of baby boomers and older investors.
Socially responsible investing’s origins are rooted in religious traditions and beliefs that often led to the crafting of portfolios that avoided so-called “sin” stocks of tobacco, guns and gambling. The result of these exclusions often resulted in investment returns that were mediocre at best. Investors were left with the choice of investing according to moral principles or earning market returns.
Over the years, this niche investment style expanded to include additional screens, like environmental concerns. Investors were then faced with selecting a socially responsible or “sustainable” investment focus. A more recent evolution brought us the terminology of environmental, social and governance, or ESG, investing.
Here’s how Investopedia defines the principles of ESG investing:
“Environmental criteria look at how a company performs as a steward of the natural environment.
“Social criteria examine how a company manages relationships with its employees, suppliers, customers and the communities where it operates.
“Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights.”
This investment strategy has evolved from a process of exclusion—not including certain stocks in a portfolio—to selective inclusion—in other words, looking for companies that do fit. There is a growing body of evidence supporting the notion that companies that pass the ESG screening process are more fundamentally sound and better managed and therefore should produce acceptable investment returns.
The most recent evolution is the concept of impact investing. Impact investing has been described as the practice of making purposeful investments into companies, organizations and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.
As socially responsible investing has evolved, its definition has become more complicated and nuanced, which can make implementation more challenging.
The good news is that there are more resources available to find strategies that align with your values. In addition, indexes have been developed and a common vocabulary has emerged to discuss nuances.
Another positive step is that, while this niche was served by a few dedicated funds and fund families in past decades, there are a growing number of mutual funds, exchange-traded funds and separately managed accounts available from an increasing number of providers.
As an investor, you now have passive approaches as well as active approaches, and the ability to find solutions that adhere more closely to your specific values. As with any investment, pay attention to management, fees liquidity and how well the strategy fits your world view.•
Hahn is a financial planner with WWA Planning and Investments. She can be reached at 812-379-1120 or [email protected]