Tanya is getting more and more interested in what is in the investment portfolio she inherited when Frank died. While the returns have been good, she wants the portfolio to be about more than just numbers. Now that she understands the market better, she is ready for baby steps: changing a very small portion of the portfolio to make a difference. And that means picking some stocks and funds that reflect her values.
The world feels like a more strident place. This feels especially true in the U.S., where polarization marks almost every aspect of our lives. From politics to economic theory to culture, we’re all a lot pricklier.
This heightened emphasis on our personal belief systems has made more of us wonder if we shouldn’t be investing in ways that support our values.
When companies do bad things, investment dollars flow away from bad actors. Think of companies that falsified auto emissions tests or caused oil spills in the Gulf of Mexico. Avoiding investments in those companies is easy because we recognize the stories of Volkswagen and BP. But, what about the tens of thousands of companies whose behaviors haven’t hit the nightly news?
That supportive effort is in the process of becoming more structured. Known as ESG, it addresses Environmental, Social and Governance concerns.
If you have any doubt about whether ESG has hit the big time, and if it’s going to play an ever-greater role in investors’ decisions in the future, here’s proof.
BlackRock is one of the world’s largest institutional investors with some $6 trillion in assets under management. In mid-2018, it announced that it was moving towards having all of its fund managers consider ESG elements when making their investment decisions.
What is lacking for the individual investor, though, is a single system that lets you quickly assess (and compare) how different investment possibilities are scored. Most available information is generated by competing third-party ESG rating services, each of which uses its own method of collecting and scoring ESG data.
For now, investors grapple with what each company is measuring, if anything, and how it ranks compared with its competitors. Here are considerations under the three major areas:
• Environment – consideration of climate change, stresses on natural resources, levels of pollution and waste, and environmental opportunities such as renewable energy.
• Social – the use of human capital, product liability issues, controversial sourcing and access to social support.
• Governance – corporate governance around its board and ownership, and corporate behavior, to include ethics, corruption and instability.
Another term we see used when it comes to value-based investing is ‘socially responsible investing,’ or social investment. It might also be called sustainable, socially conscious, green or ethical investing. It reflects an investment strategy that considers both the financial return and the ability to bring about positive social change.
Faith-based investing, sometimes called morally responsible investing (MRI), is even more focused. It has resulted in the creation of very popular funds that reflect different religious orientations without necessarily forgoing financial performance. In 2018, 250 socially responsible funds were reported to exist in the U.S., and 40 of those could be categorized as being in the biblically or religiously responsible investing space.
How a business makes money is critical to faith-based investors, who are seeking to avoid items and practices that don’t match their spiritual values. However, faith-based investments are not limited in scope. They exist across all asset classes and industries and control billions of dollars.
In the past, it was thought that to invest in do-gooder companies or funds, you would likely have to give up returns. However, research and performance history are indicating otherwise. Responsible companies enjoy lower risks of losses, lawsuits and disgruntled employees, and lower risks often produce higher returns. (source: Morningstar)
As an individual stock investor, you can do a lot of your own research and due diligence. However, making ESG investments through an ESG-focused exchange-traded fund, for example, might be easier. But how do you pick one of those?
Until scoring systems are far more transparent and user-friendly, you may have to rely on information from surrogates if you want to reward deserving companies for their good citizenship. Surrogates might include resources you trust — such as Morningstar (with its Sustainability Ratings) or Kiplinger and U.S. News and World Report with their periodic reviews and recommendations.
Values-based investing offers no shortcuts and follows the same rules of sound investing that other investments do. Your due diligence still needs to examine a fund’s investing style, quality, returns and expenses.
One concern to keep in mind is the risk of becoming overly concentrated in specific (sustainable) industries, to the detriment of a healthy level of diversification. And remember, as with any other investment, the greatest success often comes from sticking with it over the long term.