Is Your Portfolio Making a Difference?

We are faced with choices every day. We choose the food we eat, the places we shop, the brands we patronize, and the people with whom we interact. These everyday choices help to define who we are and craft our identity. Developing and implementing an investment portfolio is yet another way in which we can cultivate an identity.

Traditionally, our “portfolio identity” has been tied to an asset allocation. My identity as a risk-tolerant investor is quite different than that of a moderate investor or a risk-adverse investor due to differences in our time horizons, experiences, net worth and goals. However, my identity as a human being is defined more broadly than by my identity as an investor.

Personally, I may choose to purchase goods or services from companies that locally source their products, companies that rely on clean energy, companies that promote workplace diversity, or companies that pay employees a living wage by buying directly from those companies. Many people do not realize that they can also choose to utilize their investment portfolio to achieve the same goals. What if there was a way to more closely marry their identity as a person with their identity as an investor? Well, you’re in luck!

Environmental, Social, and Governance (“ESG”) and Sustainable, Responsible, Impact (“SRI”) Investing are the two most widely used terms for adopting an investment discipline that attempts to generate competitive market returns while simultaneously considering the social impact of the investment. These broad strategies allow investors to patronize investments that align their portfolio with their values. For the purposes of this blog series, we will focus on SRI Investing as it is a more encompassing term.

History and Growth of SRI

40.3 Trillion total assets under professional management

SRI Investing has largely been considered a niche market with limited investment options.  While the New York Stock Exchange has operated since 1792, Social, Responsible, Impact Investing didn’t gain much mainstream traction until the mid-2000s.  Although social and environmental issues emerged in the 1960s and 1970s and environmental impact issues grew in the 1980s, it didn’t spark a significant amount of investment options until recently.

While SRI Investing might be a relatively new investment concept, this discipline is by no means on the fringes of the investment landscape.  In 2016, approximately $8.72 trillion[1]of investible assets were identified under the SRI umbrella, which represents approximately one out of every five dollars under professional management in the United States according to the US SIF: The Forum for Sustainable and Responsible Investment.  That number is likely to grow as more investors are introduced to the concept and begin to understand the importance beyond investment returns.

As it has gained popularity, the investment universe has also matured.  In 1995, there were only 55 investment vehicles that catered toward SRI investments.  Today, that number has breached 1,000[2]unique investment strategies with offerings in mutual funds, ETFs, alternative investments, and even annuities and closed-end funds.  Investors are no longer limited in their choices and with the maturity of the strategies, the investment options are more diversified and targeted towards a wide array of motifs.  As investing in SRI has become a more mainstream idea, it has become more attractive to even marginal investors as well.

SRI Approaches and Implementation

While the popularity of SRI investing is relatively new, there are a number of different approaches investors can take.  The following list is not meant to be exhaustive or mutually exclusive.  Additionally, it is likely that new strategies or combinations of approaches may develop.  Investors may take components of each approach and even use philanthropy and charitable giving to create a balanced approach in order to fulfill their SRI investing desires.

Value-Alignment

Value-Alignment is likely the way you’ve traditionally thought of SRI Investing.  This approach attempts to remove some of the negative or socially destructive stocks from an investment portfolio.  Many investors have expressed an aversion to investing in “sin stocks,” which are companies that are typically defined as those involved in activities widely considered unethical or immoral such as tobacco, alcohol, and weapons manufacturing.  Still other investors have insisted on excluding countries from their asset allocations that are notorious for human rights violations or companies that have done environmental harm.

The approach to Value-Alignment is to begin with a large universe of traditional investment options and to exclude those that the individual investor finds distasteful or compromising to their identity.  The process is exclusionary in that it starts with an investment universe and attempts to screen out the negative options. The overarching investment goal, however, is still to maximize investment return and to meet personal objectives.

Environmental, Social, and Governance (ESG)

Moving beyond Value-Alignment is ESG investing.  ESG investing can be thought of as a Value-Alignment strategy with a more proactive approach to finding companies that positively align with the core philosophies.  Instead of attempting to eliminate stocks from the universe due to a negative screen, only investments that positively align with core values would be pursued. The core values of ESG are focused around environmental, social, and corporate governance concerns. The environmental focus regards issues such as whether the company uses renewable energy, mitigates pollution in an environmentally friendly way, or is at risk for a potentially negative environmental crisis (oil spills). Social issues are more closely tied to the company’s business relationships.

Does the company celebrate diversity in its workforce? Does the company pay fair wages? Does the company have a strong community involvement?  Governance issues are slightly more abstract and usually are tied to the treatment of shareholders, transparency in accounting, and political influence (i.e., does the company spend significant resources lobbying for relaxed environmental regulations?).  Companies are then scored based on how much of a positive impact they have in the respective categories.

While the definitions may be subjective, ESG strategies aim to target investment in companies that make positive impacts in their communities and in the world by proactively choosing these investments rather than screening out companies that do harm.

Thematic

Thematic investing exists in the traditional sense in that investors can pick a theme or thesis that they find attractive and use that to help with their investment strategy.  On a broad level, a theme can be as simple as investing in a certain sector of the market, such as healthcare, or a region such as China.  An example of thematic investing within the SRI framework would be identifying a socially or environmentally positive theme and investing in a strategy that pursues that theme, such as, Barclays Capital offering an ETF comprised of companies that have a significant source of Women in Leadership (ticker WIL).

Another example is the iShares Global Clean Energy ETF (ICLN) which represents companies that are active in the alternative energy space.  If either of these themes were important to you, you could purchase that respective ETF to fit within your investment policy objectives.  A thematic approach looks to develop a portfolio of themes that were meaningful to you while also being mindful of your overall asset allocation.

Shareholder Advocacy

Shareholder advocacy takes a more “hands on” approach to generating a social impact than the methods previously discussed.  Shareholder advocacy leverages the power of stock ownership in publicly traded companies to promote change from within those respective companies.  The change can be defined along broad SRI issues or can be addressed on very a focused issue.  Shareholder advocacy groups can influence decision making by proposing shareholder resolutions that, if they generate significant support from other shareholders, will enact change. While shareholder resolutions are non-binding, highly supported resolutions show strong shareholder support for change.

With shareholder advocacy, the social impact of the cause generally supersedes the desire for a financial return.  Unlike the approaches listed thus far, shareholder advocacy is a more “activist” or hands on approach.  While ESG and Value-Alignment investing can easily be executed through mutual funds or ETFs, pursuing shareholder advocacy is more likely executed through individual activism or through a mutual fund that progressively votes in proxies.

Impact Investing

If you’ve ever seen the movie Wedding Crashers, you may already be familiar with the concept of Impact Investing.  In the movie, Vince Vaughn and Owen Wilson pretend to be venture capitalist who invested in a start-up company called “Holy Shirts and Pants” that provides materials to the homeless to sew into shirts and pants.  The underlying idea is to financially support a cause with a large social impact while maintaining some level of return.

Impact Investing originally became popular through the granting of microfinance loans, which are small loans to low-income individuals who may not have access to capital through traditional means.  The loans may allow these individuals to pursue a small business and generate sustainable income.  Today, that same concept has gained popularity through housing projects that charge significantly below market rent for a targeted class of residents.  Impact investing is typically more eclectic and similar to private equity in that the investments are typically more illiquid with much higher investment minimums.

Concluding thoughts

SRI Investing has historically been thought of as a fad.  It has existed around the fringes of traditional investing as investors have historically cared more about returns than about social responsibility or how investments propagate their own personal identity.  As these social causes have become more prevalent in mainstream society, the importance of them in our portfolios has become more prevalent as well.

Looking forward, matching investors personal identities to their investment portfolio will include more than just a risk assessment and a balance sheet – it will encompass a full understanding of the issues that help define the individual investor.  In the coming months, our team will be publishing a series of educational content on Sustainable, Responsible, Impact (SRI) Investing.  We highly encourage you to reach out to a Round Table Wealth Advisor to let them know what issues are important to you as we investigate ways to incorporate SRI investing into your portfolio.

[1] US SIF. “Report on US Sustainable, Responsible and Impact Investing Trends 2016.” P. 12.  

[2] US SIF “Sustainable and Impact Investing Money Managers 2016.”  

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2019-08-15T21:22:00+00:00

About the Author:

Michael Fischer is a Director, Wealth Advisor at Round Table Wealth Management. Read Michael's Biography >