Sustainable Investments Earn while Making Social ImpactNov 09, 2017 03:00AM ● By Scott Sadler
But when it comes to how they’d like to earn those returns, they can be quite a diverse group. Investors used to turn a blind eye to the investments in their retirement plans or brokerage accounts that ran afoul of their values. But no longer.
These days, one’s investments can be structured in a way that is consistent with personal values.
Investors who care deeply about the environment might recoil at the thought of investing their hard-earned money in companies that have added to the earth’s pollution. Others see human rights as a top concern. Companies in their portfolios would likely be fair and equitable employers, and deploy philanthropic dollars for the benefit of their communities.
Religious guidelines are also often applied to investing.
Many investors’ portfolios today are very personal.
The Growth of Social InvestmentHistorically, investors considered charitable contributions to be their social-impact activity, not their investment portfolios. And a common pushback against social impact investing has been: “I separate my investments from my charities.”
But times are changing. The important takeaway for modern investors is that the two need not be mutually exclusive. Surely one’s investments shouldn’t undermine the positive contribution that they wish to make from charitable activities: Investors can often make a positive impact with their investments without earning lower returns.
This concept of investing for a positive, or even just less negative, societal impact is not new. It has been around since the days of the Puritans (who were among the first social investors.) Today, it is often called Sustainable and Responsible Investing (SRI.)
In the past five years, this approach has really gained traction with mainstream investors. As a result, total assets in socially focused mutual funds have grown to more than $150 billion in the U.S. alone. The largest investment firms, including Vanguard, Morgan Stanley, Invesco and Fidelity, have joined the numerous SRI specialist firms by offering socially focused funds.
Millennial investors are particularly interested such strategies. In fact, a recent survey showed that wealthy millennials are three times more likely than other generations to own so-called “impact investments.” This generation is twice as likely to see its investments as a way to express personal values, and it is more likely to believe that such investments are likely to earn competitive returns.
The finance industry, seeing these trends and attitudes, has responded with the specialization that most investors desire. SRI funds now exist across most asset types, from large companies to small ones to international firms, from broadly diversified, low-cost index funds to actively managed funds focused on environmental markets. There are funds focused on companies with large numbers of women on their boards or that have the lowest carbon footprints.
Who Does Social Investing Benefit?The range of options for social investors has never been larger. In fact, companies of all sizes can now design 401k plans for their employees that have a full complement of socially focused vehicles. This can give employees more incentive to save when they see an investment approach that is respectful of their values. Likewise, the company is aligning this employee benefit with the corporate profile it wishes to project.
Of course, socially focused funds can only make it into corporate plans if their performance has been competitive. And according to fund rating service Morningstar, the financial performance of sustainably focused funds isn’t much different from that of conventional funds. In fact, it’s a little better, with the SRI group a larger percentage of highly rated funds (4 and 5 stars) and a smaller share of lower performers (1 and 2 stars). So, investors have a decent chance of picking respectable performers if they confine themselves to SRI funds. Additionally, credit unions and community development banks offer competitive deposit rates versus traditional bank, while focusing on local issues and playing an important social investment role by lending locally.
Investors have never had more options for doing well financially while doing some good socially.
Scott Sadler is a founder and president of Boardwalk Capital Management, an independent registered investment advisor specializing in sustainable investing. For more information visit BoardwalkCM.com. Next month this series will detail how to get started immediately in researching and building a socially focused investment plan.