For many years, socially responsible investing was focused mainly on negative screening. In other words, it was what you kept out of the portfolio. Personal, religious and environmental values have always played a role in that process. Today, the popularity of a more positive approach to socially responsible investing is on the rise, focusing on impact investing that performs negative screening but also looks specifically at investing in companies, organizations or funds that create positive social or environmental impact.
The 2013 U.S. Trust Insights on Wealth and Worth survey, published in May 2013, showed that 71 percent of investors feel it’s more important to invest in companies that will have a positive social or environmental impact than to boycott companies that are harmful. Additionally, almost half of investors surveyed noted they’re willing to accept lower returns from investments in companies that have a greater positive impact.
Values-based investing accounted for $3.74 trillion, or roughly one in every $8 to $9 under professional management, according to a 2012 report from the Forum for Sustainable and Responsible Investment (US SIF). That’s 22 percent higher than the $3.1 trillion noted in SIF’s 2010 report.
To do good and do well, investors should not only look for companies with strong fundamentals, but also seek out corporations that derive revenue through their management of human capital, environmental stewardship and good corporate governance. These three socially responsible categories offer investors an opportunity to accompany their personal values with positive monetary and social return.
One example of valuable human capital management can be “gender lens” investing: investments focused on improving the lives of women and girls. In many cases, companies with progressive policies toward gender equality are well managed and, often, help recruit and retain top talent.
Environmental stewardship examines the use of water, alternative energy, climate change and clean tech. Companies that are focused on sustainable efforts can be rewarded with cheaper operational costs in the future. This can ultimately benefit the investor if the company’s cost-saving technology produces a higher profit.
Corporate governance focuses on corporate transparency, disclosure, reporting and incentives. It’s important for socially responsible investors to understand the operations of a company. For these stakeholders, the best way to invest is to find a company that maintains an open line of communication with those invested in its success. Investors can determine whether a company believes in full disclosure (or not) by taking the time to review its website to determine how well it communicates with its stakeholders.
Beyond the aforementioned tips, individuals can also look to invest in socially responsible sectors. A rise of investment in sectors such as clean technology, microfinance and community development finance can increase profit while addressing societal challenges like reducing carbon emissions or alleviating poverty.
The trend of investors looking to do good and do well is changing the wealth management space, creating a new, more active and demanding approach to social investing. More and more, investors are realizing that strong corporate financial performance and social responsibility are not mutually exclusive but, rather, are mutually beneficial qualities. Financial firms are expanding their offerings even further today to meet the demand for investment tools that aid in socially responsible investing.
Resources are available to help investors research and determine companies that meet their expectations for progress in economic, environmental and social issues. For example, the annual Dow Jones Sustainability Index (DJSI) tracks the financial performance of the leading sustainability-driven companies worldwide. Part of the DJSI, the Corporate Sustainability Assessment analyzes financially material economic, environmental and social practices of companies, such as innovation or supply chain management, climate strategy and stakeholder engagement. The assessment places a special focus on industry-specific risks and opportunities.
Additionally, the international and nonprofit organization, CDP, publishes reports that measure, disclose, manage and share vital environmental information. CDP’s annual S&P 500 Climate Change Report and Global 500 Climate Change Report provide a global disclosure system for companies to report their environmental impacts and strategies. Investors can review these reports to gather more information on the progress of S&P 500 and Global 500 companies in reducing emissions, responding to climate-related risks and opportunities, and mobilizing influence to manage climate change.
There are also private sources of information that can help individuals determine companies to invest in. The consulting group IW Financial provides research and tools to help investment and wealth managers with evaluations on investments following environmental, social and governance guidelines. Investor’s Circle is a network of angel investors focusing on funding socially responsible entrepreneurs, which gives investors a guideline for companies that are being funded for socially responsible reasons. Finally, the Aperio Group develops custom portfolios to meet investors’ values and still provide market returns.
Ultimately, you can do good and do well with a balanced investing approach. Work with a financial adviser who understands your long-term needs and investment personality but also understands what you value most.
Richard A. Hogan is a managing director in Merrill Lynch Wealth Management’s Private Banking and Investment Group in San Francisco. His team manages roughly $2 billion in client assets with close to $30 billion in total client net worth. He’s been recognized by Worth magazine and Barron’s as being one of the top financial advisers in America. You can reach him at r_hogan@ml.com.
