Our values play a large role in the way we live; from what we consume, to how we spend our spare time, to what we spend our money on. If you value your health, it’s likely you eat well-balanced, highly nutritious foods and prioritize exercise. If you value family, you spend time enjoying each other and may spend extra on entertainment, memories, or gifts. It has been said that to understand what a person values all you must do is look at how they spend their two most valuable resources; their time and their money. While this is true, until the recent decade or so, many did not consider how their savings aligned with their personal values.
Today, many people are looking for ways to invest their values and leverage their savings for good. The market for socially responsible and impact investing has grown rapidly over the past decade. As you research options related to investing, your values you may be wondering what the differences are between socially responsible, ESG, and impact investing. Additionally, I find people are curious about what investment options are available when it comes to values-based investing.
Socially responsible investing (SRI) seeks to consider social, environmental, and governance factors alongside the more traditional considerations like financial return. The social filter looks at companies for how they treat their clients and other social issues. The environmental filter looks at the company’s impact on the environment as a whole or the “green factor”. Governance looks at how the company is run-often considering gender equality and the independence of the board. Socially responsible investments primarily focus on filtering out companies that do not meet the criteria. This is more of a negative screening process.
Impact investing refers to investments made into a company or organization where the funds are used to make a measurable impact socially or environmentally in addition to generating a financial return. Nearly all of the funds raised into the investment go toward a specific cause like affordable housing or clean water.
One additional concern many have regarding socially responsible investing is that due to the nature of additional filters on investments and a narrowing of the options, many feel that this could negatively impact the return of the investment. While this was an early concern, much of the research today indicates that these additional filters help weed out subpar companies and can actually help remove tail risk from investments.
When it comes to deciding exactly how you want to invest your values, that is a personal decision. Some things to consider when identifying ESG, SRI, or Impact investment options are:
If investing your values is important to you, SRI, ESG, and impact investing may be a good choice to help you grow your nest egg. As with any investment, it important to be informed and educated about what you are taking a stake in. Identifying your options and making an informed decision will lead to more peace of mind about your choices.
Today, many people are looking for ways to invest their values and leverage their savings for good. The market for socially responsible and impact investing has grown rapidly over the past decade. As you research options related to investing, your values you may be wondering what the differences are between socially responsible, ESG, and impact investing. Additionally, I find people are curious about what investment options are available when it comes to values-based investing.
Socially Responsible Investing
Socially responsible investing (SRI) seeks to consider social, environmental, and governance factors alongside the more traditional considerations like financial return. The social filter looks at companies for how they treat their clients and other social issues. The environmental filter looks at the company’s impact on the environment as a whole or the “green factor”. Governance looks at how the company is run-often considering gender equality and the independence of the board. Socially responsible investments primarily focus on filtering out companies that do not meet the criteria. This is more of a negative screening process.
Environment, Soical, Governance
Impact Investing
Impact investing refers to investments made into a company or organization where the funds are used to make a measurable impact socially or environmentally in addition to generating a financial return. Nearly all of the funds raised into the investment go toward a specific cause like affordable housing or clean water.
Negative Filters and Returns
One additional concern many have regarding socially responsible investing is that due to the nature of additional filters on investments and a narrowing of the options, many feel that this could negatively impact the return of the investment. While this was an early concern, much of the research today indicates that these additional filters help weed out subpar companies and can actually help remove tail risk from investments.
Things to Consider
When it comes to deciding exactly how you want to invest your values, that is a personal decision. Some things to consider when identifying ESG, SRI, or Impact investment options are:
- Define what is important to you - Some issues or values may be more important than others. For example, you may decide that data privacy is an important concern and you may choose to invest is companies that only take your privacy seriously. Or, you may decide that our carbon footprint is important and would choose to not invest in big oil.
- Consider your options - Some options are individual stocks, mutual funds or exchange traded funds. While investing in a single stock may allow for more transparency as it relates to ESG, SRI and impact, a mutual fund or ETF could provide some diversity and reduce the volatility.
- Do your research - Many companies and all mutual funds and ETFs that have an ESG or SRI component will have an ESG rating by an independent third party. There are several to consider like Morningstar, Bloomberg and MSCI. Likely, each company or fund will have a different rating by each of these. But each of them shows the information broke down by each category (social, environmental and governance.)
- Consider the cost of values-based investing - I am guessing that if you are investing, you are doing so in order to have the potential to earn more on your savings. SRI and ESG tend to have a slightly higher cost than that of similar investments without the screening. This is in part due to the additional research and filters along with lower trading volumes.
- Develop a diversified portfolio - Even if you have decided that SRI is an important filter for you, maintaining a well-diversified portfolio across multiple assets classes is important. This includes company size, geography, developed and emerging markets, growth and value, fixed income and equity. A diversified portfolio helps offset risk from any one asset class.
- Work with a professional - If values-based investing is important to you but you feel overwhelmed by the process, meet with a qualified financial advisor who understands the SRI and ESG market. They will likely have investment options that they have done research on or have the tools to accurately research options and will be able to help you identify the best approach for you.
Be Informed
If investing your values is important to you, SRI, ESG, and impact investing may be a good choice to help you grow your nest egg. As with any investment, it important to be informed and educated about what you are taking a stake in. Identifying your options and making an informed decision will lead to more peace of mind about your choices.