Banking / Financial

Socially Responsible Investing

For investors who wish to align their values with their investments, there is no shortage of information and strategies.

While organizations, charities and endowments have had a long history of values-based investing to ensure their investments align with their missions, this approach is becoming more common as society grapples with issues such as climate change and social justice. In fact, 75% of all investors, and 86% of millennials, indicated an interest in sustainable investing in 2021, according to a FinanceBuzz study. There are three distinct types of “values-based investing”: 

Socially Responsible Investing (SRI) involves avoiding investments in companies that have negative environmental or social impacts.

Environmental, Social and Governance (ESG) investing refers to making investments in companies after considering their impact on society and the environment, and their corporate governance structure. With ESG investing, in addition to looking at the environmental and societal impact of a company, investors may look at executive compensation, employee diversity inclusion, or representation of women and minorities on the board.

Impact Investing involves investments in companies with a goal of beneficial social or environmental change.

For investors who wish to align their values with their investments, there is no shortage of information and strategies available. In fact, there are numerous rating agencies that publish data on the “ESG score,” which is a numerical measure of how a company is perceived to be performing on a wide range of ESG related topics. There are many companies who have made ESG, SRI, and Impact specific investment vehicles available to the public through both mutual funds and exchange traded funds (ETFs).

When considering ESG compliant investment vehicles, investors should consider that technology giants often have high ESG compliance scores due to their smaller carbon footprints. Therefore, a highly ESG compliant portfolio should be reviewed thoroughly to ensure proper diversification. A high ESG compliance does not always translate to social responsibility or an alignment with your individual values. Many of the tech giants (and other high scoring ESG companies), for example, are criticized for tax avoidance, their employee benefits, and their holding monopolies in certain industries.

ESG and SRI data and rankings can be considered as ways of identifying well-run companies and avoiding negative investing surprises, or “investment land mines,” as companies with high ESG compliance by nature should also have strong governance and internal cultures.

For investors who are interested in values-based investing, they should speak with their advisors to determine their portfolios’ ESG score and how best to implement a values-based approach within their own portfolios.

About the Author

Steven Gelber, AIF®, is an associate wealth advisor at Hightower Financial Principles in Fairfield.

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