The responsible investing market in the United States and around the world is growing. Investors are demanding investment vehicles that line up with their values – meaning companies will try to meet this demand. Whether investors want to improve environmental responsibility; examine and change how organizations are run at the highest levels; or affect positive changes in local and global communities, more investment vehicles than ever can provide these opportunities.
Even with increased options out there, it may be challenging to invest conscientiously and sustainably without help. Investors probably own shares of a few companies that don’t align with their morals on some level, and it may be confusing to clarify information. These are challenges investors may face when they invest sustainably. The solution lies in doing your homework and getting the help of a wealth advisor who specializes in the sustainable investments you’re considering.
Socially responsible funds have existed for approximately 45 years, and often were referred to as SRI funds. With the evolution of the field and the terms used within it, it’s not always clear what to call responsible investments. They might be called “socially responsible,” or have environmental, social and governance (ESG) criteria. “Sustainable investing,” “responsible investing” and “impact investing” are other frequently used terms. ESG criteria varies between sectors, companies, countries and investors.
When looking at sustainable investing, consider how your investment vehicles are linked to planet health, resource use and availability, and improving human lives at home and around the world. Whether you want to invest in low-carbon funds or find ways to contribute to the health of the global economy, you’ll likely find something you’re looking for in sustainable investing.
Profitability is easy to measure, but sustainable investing is about more than financial returns. There are disagreements about how to define the value of sustainability – whether that means quantifying change in financial terms or finding a way to measure positive social changes. This is complicated by the fact not all changes have linear or immediate relationships, and some challenges faced by sustainability measures are multifaceted and can’t be solved on one front alone.
When considering funds for sustainable investing portfolios, investors need to examine their holdings and those of companies in which they are thinking of investing. Morningstar publishes a sustainability rating on selected mutual finds that is a measure of how funds handle different sustainability issues compared with peers in their industries. The Sustainability Accounting Standards Board (SASB) also identifies challenges, and supplies information for various sectors and industries for public companies in the U.S.
Knowing What to Exclude
Investors need to know their own personal metrics for sustainable investing. Consider what personally would be a deal breaker when you invest. Investing is about including what you want, but in some cases, it’s a matter of excluding what you don’t want.
Historically, sustainable investing funds have avoided or excluded certain industries. Religious portfolios would invest along their value lines, and other funds would avoid industries such as oil and firearms. Today, this remains the case for some vehicles. Consider how far you want to go. Are you OK with a company making money off something with which you don’t agree, even if it’s not producing it?
Challenging Performance Perceptions
One of the perceptions about sustainable investing is that values must be sacrificed for profit, and that these funds underperform traditional funds and indexes. This is an outdated perception. A majority of the research into sustainable investing shows a positive relationship between financial performance and ESG factors. Any investment opportunity presents risks or opportunities for investors, and while social and financial goals could work against each other in the short term, sustainability goals align in the long term. Investors must move past the perception that there’s little or no financial value in responsible investing.
Weighing Cost and Diversity
Index-fund investors invest in every stock or bond in a market segment. While this is a low-cost way to invest and provides a great deal of portfolio diversification, there are inherent risks involved with indexing that many investors do not understand. For example, index funds can become overweight in “hot” sectors of the market that have become overvalued, and most of these funds do not consider environmental, social and governance risks. Certain investment advisory firms, sometimes referred to as “robo advisors,” exclusively utilize index Exchange Traded Funds (ETFs) and computer algorithms to manage portfolios. The use of robo-technology and index investing may reduce investment expenses and increase diversification, but at what long-term cost?
Accessing Sustainable Investments
A lot of investments are made through workplace retirement plans such as 401(k)s, which have their limits. Employers won’t necessarily offer sustainable funds in their retirement plans, because they don’t want lengthy lists of investment options. However, some employers are beginning to realize responsible investing is consistent with their fiduciary duties to their plans. More companies are starting to offer SRI funds in their 401(k) plans, and employees have the right to ask their employers to add these funds.
Individuals looking to invest responsibly face challenges of understanding the environmental, social and governance risks to which they’re exposed in their portfolios. SRI funds can screen for these factors, but investors still might have investments in companies they otherwise want to avoid, based on their own social screens. Portfolio managers who integrate ESG criteria in their investment processes know no company is perfect when it comes to its sustainable policies, but they may choose not to invest in or divest from companies that egregiously fail.
Investors and portfolio managers can affect change in other ways as well. Staying with a company to have constructive conversations about sustainability is as much an option as divesting is – because a stakeholder could convince the company to improve its ESG policies. Sustainable fund managers also have the right to issue shareholder resolutions as well as have voting privileges with their companies, which can lead to positive policy changes. Individual shareholders may be empowered to use online campaigns to get the attention of company management. Collectively, these efforts often are referred to as “shareholder advocacy” or “investor activism.” Sustainable investing is about making positive changes – whether it’s with your wallet or with your voice – and as long as investors are attentive and passionate, those changes can happen sooner rather than later.
Make Sustainable Investments With Falcons Rock Impact Investments
There are more investment options for SRI vehicles than ever before, which may lead to more questions from investors like you. Falcons Rock Impact Investments is a resource for conscientious investors who want to explore sustainable investing. We screen our investment options, and will match you with strategies appropriate to your priorities, risk tolerance and financial situation. Like robo advisors, Falcons Rock Impact utilizes online technology to simplify the account opening process; unlike typical robo advisors, Falcons Rock Impact manages portfolios that include both index funds and actively managed funds that integrate ESG criteria in their investment process, and often serve as shareholder advocates. Learn more about how our impact investing process works to get started in a growing investment landscape.