The call to action for climate and social change is louder than ever. Government oversight is growing, companies are focusing on sustainable practices, and consumers are more careful about where they spend.
As an investor interested in making a positive impact, you’ve likely considered socially responsible investing (SRI).
The general idea of SRI is simple enough—your money works towards the greater good. But there are a few considerations and common misconceptions that you should address before making changes to your investment strategy.
To help determine if SRI is right for you, we’re breaking down five facts about values-based investing you may not already know.
1: SRI Is A Broad Concept
There is yet to be a universal or standardized definition of what, exactly, SRI is. While most agree the primary focus is putting money into companies that strive to create environmental or social change—the guidelines get hazy from there.
What may be a priority to you may not be to others. Therefore, your definition of a socially responsible investment might not be the same as another investor’s idea. Confusing, right?
As SRI has grown in popularity, there has been a more significant effort to standardize some aspects. You may have heard of ESG, for example. ESG stands for environmental, social, and governance, and it’s a set of non-financial criteria investors use to measure a company’s impact efforts.
- Environmental: Conservation and harm reduction to the environment
- Social: Consideration for individuals and communities
- Governance: Following ethical practices for self-governing and auditing
As ESG investing continues trending, more and more companies are even opting to provide ESG reports and disclosures to investors upfront.
What Is Greenwashing?
A lack of standardization for SRI and ESG investing has created a devious loophole some companies are taking advantage of.
Greenwashing is the practice of a company providing false or misleading information regarding their environmental or social practices. The company’s claims regarding its impact on the environment may be unsubstantiated or deceptively marketed.
Greenwashing can cause socially conscious investors to put their money into companies they believe are doing good. In reality, these companies may not be making the impact they’ve deceived investors into thinking they are.
2: SRIs Are Chosen by Using Screens
Screens are a standard tool used when selecting investments. In the context of SRI, we use screens to both identify positive companies and weed out negative ones. This process allows investors to determine what factors are important to them and find companies that fit the criteria.
At Woven, we use screens to identify and prioritize companies focused on reducing greenhouse gas emissions. We also take a look at land use and biodiversity, as well as a company’s history of toxic spills, water management, and operational waste. Similarly, these screens and criteria help us exclude companies that use coal, palm oil, child labor, firearms, and cluster munitions.
Screens give investors the power to be selective and define what factors are most important to them when building a sustainable or socially focused portfolio.
3: You Don’t Have to Sacrifice Performance
The Forum for Sustainable and Responsible Investment (US SIF) quotes a recent study by the Morgan Stanley Institute for Sustainable Investing, saying, “there is no financial trade-off in the returns of sustainable funds compared to traditional funds, and they demonstrate lower downside risk.”1
This data supports the idea that while you want your investments to align with your values, you don’t have to lower expectations regarding portfolio performance. It’s entirely possible to identify opportunities for growth that still meet your impact criteria.
Various segments in the market are continuously growing their ESG-focused offerings – including mutual funds, variable annuity funds, ETFs, alternative funds, credit unions, and more. For reference, ESG assets totaled $3.10 trillion managed by registered investment companies in 2020. That’s a 19% jump from 2018.1
In fact, sustainably focused investments accounted for about $17.1 trillion, or one-third, of all professionally managed assets in America in 2019.1
4: Diversification Is Still Important with SRI
One of the pillars of a solid portfolio design is diversification, which still rings true for socially focused investors.
It’s critical to avoid being over-concentrated in any one industry or company, even if they meet your ESG criteria.
At Woven, we use screens to take a look at a wide variety of opportunities, including domestic companies, international and emerging market companies. It’s important to diversify the type of investments as well, finding SRI funds that invest in bonds as well as stocks, for example.
5: SRI Isn’t Perfect, But It’s Still Better
There’s no getting around it—maintaining the pillars of a solid investment portfolio design while considering your personal values and beliefs is challenging.
Corporations aren’t perfect, and finding ones that truly value the same things you do takes time. That’s why when it comes to SRI, finding companies that are striving for “better” rather than perfection is still a worthwhile goal.
Remember, what’s “better” for you will differ from what’s “better” for another investor. Some people may love the vision of the latest Silicon Valley tech company, and others may disagree with their mission. But opting to be a conscious investor, no matter your criteria, is still better than investing without focus.
Interested in SRI?
The team at Woven is passionate about finding value-focused investments. Aligning our expertise with your desire to create an impactful portfolio can help ease the burden during the transition process.
Socially responsible investing continues to grow in popularity as more individual investors strive to align their portfolios with their values. If you’re interested in doing this, don’t hesitate to reach out today.