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Socially Responsible Investing: Match Your Values with Your Investment Strategy

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The following post is an excerpt from an article written by Wisdom Wealth Strategies advisor Andrea L. Blackwelder, CFP®, ChFC for Retirement Weekly, a publication of MarketWatch. The full article can be accessed by subscription here.

Does this sound familiar? You’ve committed to reducing your household’s environmental impact by recycling as much as possible, composting food waste, taking reusable bags to the grocery store, and avoiding Styrofoam like the plague. You regularly donate to local food banks and second-hand clothing and home goods stores. Around the holidays, you select a few local community organizations to which you give your time and a monetary gift. Then, upon a year-end review of your investments, you realize with horror that you’re investing your money in companies with which you wouldn’t consider having personal, face-to-face interactions due to their social, environmental, or political impact. With a sinking feeling, you realize that the values by which you live your life aren’t reflected in the way you invest. Ouch.

According to The European Sustainable Investment Forum, Sustainable and Responsible Investing (SRI) is a generic term covering any type of investment process that combines investors’ financial objectives with their concerns about Environmental, Social and Governance issues.”

The architects of socially responsible investment products approach the design of their investments using two primary methods: inclusion (encouragement) and exclusion (discouragement). Products designed with an inclusive approach strive to encourage companies to endeavor to meet the standards set forth by the fund in order to be included for investment. On the other hand, products with an exclusive design seek to punish companies that do not meet their requirements by prohibiting the investment from owning the non-compliant company. Product providers can devise a nearly endless range of screens, but according to Investopedia.com, the most common are corporate governance and ethics, workplace practices, environmental concerns, product safety and impact, human rights, community relations, and indigenous peoples’ rights. Additional areas of focus include the “sin” industries, like alcohol, tobacco, and weapons or defense.

Most investors opt for selecting the investments that meet their needs from the wide range of products available. For these individuals, the two most common methods of investing with a socially responsible tilt are through the use of mutual funds and exchange-traded funds (ETFs). Mutual funds and ETFs provide quick and easy access to a diversified portfolio of companies. The investor is only responsible for determining which behaviors they wish to encourage or discourage and the funds that most closely provide such a screen. The advantages in simplicity and time are obvious. Drawbacks do exist, however. Primarily, investors should understand that creating socially responsible parameters or standards is very subjective. For example, what level of environmental pollution is acceptable? What level of gender diversification is appropriate in the workplace? It may not be possible to find a fund that is an exact match and compromise may be necessary. Another drawback is the potential costs related to socially responsible investments. Historically, SRI funds were associated with internal costs that were higher than non-SRI competitors. While the development of less expensive ETFs has helped, investors should take the time to evaluate the cost of each investment prior to adding it to their portfolio.

The decisions each individual makes regarding his or her lifestyle and the impact of those decisions on their local and global community can be very personal. For those who choose to take the next step in living and investing according to their values, it’s encouraging to know that the investments available to support their mission keep growing and improving.

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