Values Based Investing – the Next Generation

Before jumping into this month's financial planning column, on behalf of my colleagues at EKS Associates, I wanted to offer our thoughts and prayers to all those affected by Hurricane Sandy. It's in times of crisis like this when the community comes together to help each other out.  We hope columns written by EKS professionals have and will continue to provide valuable information that helps get individuals and families on sound financial footing.

Socially Responsible Investing (SRI) is not a new concept.  Its origins date back to biblical times and faith-based investing promoted by religious leaders of the time. Since then it has grown to include more social and environmental values. SRI’s modern popularity and success can be traced to the 1960s and ’70s with anti-military and environmental issues. If anyone doubts the impact SRI can have on the world, just consider the anti-apartheid movement (“Divest Now!”) and how much of an impact the individual investor had by placing pressure on American
companies not to involve themselves with companies conducting business in South Africa. 

I’d like to use this month’s column to explain Social Responsible Investing and how it can be incorporated into a person’s investment philosophy.

SRI can go by many names: values-based investing, ethical investing, green
investing, ESG (environmental, social, governance) investing.  Most people live their lives based on a set of values they consider to be important. These values impact almost every aspect of their lives.  This is a quality I find admirable.  However, most people do not understand if or how they can incorporate these values into their investment philosophy as well even when these values help shape other day-to-day decisions they make. An example is a person’s refusal to support a company that conducts business in the Sudan, or a company with unfair labor practices. This person may even boycott certain stores based on these practices. However, they invest in mutual funds that invest with these companies. Many individual investors are not aware that there are investment opportunities available to them that would allow them to achieve their personal as well as financial goals. And access to these investments is easy. It’s a topic that I’m passionate about.

I recently attended an excellent conference on Socially Responsible Investing,
held at the Mohegan Sun Resort in Connecticut. The conference focused on “Sustainability and Responsibility,” and the impact these two ideas have on one’s investment portfolio.  And yes – there were actually two gentlemen who looked and dressed like Jerry Garcia of the Grateful Dead, right down the tie-dyed shirt and Birkenstocks (and I was not one of them). 

Before I discuss the concepts of Sustainability and Responsibility I would like to
answer a few commonly asked questions about socially responsible investing:   

1.  Investors do not have to sacrifice investment returns to invest in accordance with their values. SRI funds return similar to the broader universe of funds, and over certain periods of time actually outperform the broader universe of funds.  

2.  Investors do not have to pay a premium (in terms of a higher than average expense ratio) to invest in their values. The cost of SRI mutual funds is similar to that of Small Cap and International Equity mutual funds. 

3.  There are more than 500 investment products in the SRI universe (and growing) including mutual funds and exchange traded-funds (ETFs), so investors can create a diversified portfolio. 

4.  Currently $1 of every $8 invested is done so in SRI products. This is more than the current inflow of dollars into the S&P 500.

SRI has stood for Social Responsible Investing. It has evolved to mean “Sustainable and Responsible Impact” investing. The word “sustainability” has become one of the most important words in the English language. Whether it is used to discuss healthcare, Medicare, social security, energy and environmental resources, or investments, it can be defined the same: meeting the needs of the present without compromising the resources of future generations.  "Responsibility” calls for use of an investment process that considers the social and/or environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis.” Keep in mind, these are investments we are talking about, therefore financial analysis still plays a key role in the investment selection. The idea of Sustainable and Responsible Impact investing combines these two ideas into one approach, identifying businesses that are sustainable, responsible and sound investments. This is no longer a fringe idea. Ask yourself: Why would an investor want to invest in a company that is not sustainable?

SRI is growing past the idea of just positive and negative screening. It is not
just about identifying an issue you feel strongly about and removing investments from your portfolio.  It is more about identifying investments that are there to help us into the future, not just provide immediate short-term benefits. Areas that can be identified for investment can be based on the more well-known values, such as faith based initiatives, environmental issues and social values; but they can also be based on beliefs regarding corporate governance, shareholder advocacy, and community investing. Let’s take the current climate and the Wall Street vs. Main Street debate.  There are investments available for those who support reporting and disclosure by companies, executive compensation issues and overall corporate accountability. The impact on investment performance would come from aligning the interests of shareholders and management (an interesting concept) or avoiding unpleasant financial surprises in the future. There are investments available to those who believe they have a responsibility to give back to their community and promote philanthropy. Those practicing SRI can invest with community banks vs. national banks. There are opportunities to support companies that have a positive impact on social issues such as product safety and integrity, or workplace issues (diversity, human rights issues). The impact on investment performance in these cases could be improved workplace morale and productivity, improving product safety and brand loyalty, and reduce the risk of costly litigation. 

SRI is no longer a fringe area of investment. It continues to grow by leaps and
bounds and more importantly, it is available to average investors. YOU can make a difference in the world by choosing where and how to invest. For proof, just turn to thousands upon thousands in South Africa who can vouch for its effectiveness.  You can start at any time. These are your values.  You can determine how much you would like to invest in this arena. It is not an all or nothing prospect. It is a personal choice, and you need to know you have a choice as it relates to your investments.

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About the Author:  Darren Zagarola is a CPA, a Certified Financial Planner, and a Personal Financial Specialist with EKS Associates, a fee-only financial planning firm with offices in Princeton and Roseland. He can be reached at 609-921-1016, or at dzagarola@awplan.com