- How would you describe socially responsible investing? Years ago if you asked this question, I’d bet that most people would have defined a socially responsible portfolio as one which simply excluded alcohol, tobacco and firearms investments. Today, the definition is so much broader and includes not only exclusions, but deliberate inclusions as well. For example, many socially responsible investors want companies in their portfolios that have a diverse boards of directors, or companies focused on protecting our environment, or whose human resource policies include fair treatment of workers (particularly related to child labor laws) globally. What we previously referred to as “SRI” (socially responsible investments), we now more commonly call ESG— which include a broader focus on environmental issues, social issues and corporate governance.
- Are the risks different than other types of investments? If so, how? Just as different sectors can be in favor one year and not the next, we have also seen SRI/ESG investments trend up or down as compared to traditional portfolios depending on the year. However, most people who choose to be socially responsible are doing so in order to align their values with their money— and this reason, for most, is more important than whether or not an SRI/ESG portfolio is going to outperform a non-socially responsible account in any given year.
- Are there challenges to this type of investing? Yes, but none which are too difficult to overcome. The challenge for the individual investor is to define what they themselves consider socially responsible. For example, we had a client who defined her investment philosophy by excluding companies whose products cause cancer, including companies who are working hard to find a cure for cancer. That was her definition of socially responsible investing. For this client’s definition, “Company X” was acceptable in the portfolio because it is focused on looking for a cure for cancer. However, for another client who is passionate about animal welfare, this same company may be entirely unacceptable because their cancer research is tested directly on animals. While there are SRI/ESG industry standards and definitions, this often becomes a subjective conversation when people begin to apply their own screens to their investments. Because ESG investing can vary so widely, it is important to discuss these topics in some detail to ensure your investments align with the ESG priorities that are most important to you. If your personal definition is very specific and you are not willing to stray from it, you may end up needing to buy and hold individual stocks and bonds. If you don’t have sufficiently large sums to invest, you can end up lacking diversification in your portfolio and retaining more risk than you otherwise would by investing in ESG mutual funds.
- Why should folks decide to invest this way? How someone invests their money is a very personal choice. If getting the best rate of return on your retirement account is your #1 priority, then you might opt for a traditional investment portfolio. If it is important to you that your money be invested in companies that align with your values, then an SRI/ESG portfolio might be better for you. Socially responsible portfolios may or may not underperform traditional investing, but it is important to note that the costs are often higher for ESG funds because of the time and research required to select the appropriate investments, continually monitor the companies for ESG criteria, and encourage shareholder proxy voting on ESG issues.
- What impact does this have on the community? I think a better question to ask is “What impact does this have on us globally?” When you have millions, if not billions, of dollars being invested in companies around the world which treat workers well, which handle the environment with care, which believe in diversity, fair trade, and fair pay— when people collectively state that these things are universally important and are willing to NOT invest in companies who don’t do this great work— it begins to make a huge impact on our world.
- So is this why The Women’s Fund invests in this way? Most definitely. For an organization’s mission to be focused on the betterment of women and girls—to not invest with a socially responsible approach would be a complete mismatch. The Women’s Fund has a clear set of values, and further demonstrates these values in their portfolio. This alignment of money and values matters to donors.
- Why would you say this is important for your firm and for your clients? In an ideal setting, we would all have our values be in alignment with our investments. For some people, this takes time to define and build. In my experience working with clients, having knowledge about socially responsible investments, and taking the time to educate our clients about their options, can make a profound difference in someone’s financial well-being because of the difference their investments can make both for them and the world they live in.
Our thanks to Amy and The Jamrog Group for giving us an education on investing!