How To Build A Socially Responsible Portfolio That Works

It’s no secret that at Woven Capital, we are passionate about socially responsible investing. But this zeal isn’t limited to our office, SRI has seen a tidal wave of proponents over the last several years and is expected to gain...

It’s no secret that at Woven Capital, we are passionate about socially responsible investing. But this zeal isn’t limited to our office, SRI has seen a tidal wave of proponents over the last several years and is expected to gain a lot more in the future.

The US SIF report on Sustainable, Responsible, and Impact Investing Trends discovered that ESG (environmental, social, and governance) investment criteria comprised $12 trillion, or $1 of every $4 invested, of professionally managed assets in 2018.

BlackRock even predicts that sustainable ETFs will surpass $400 billion by 2028.

The popularity of SRI comes from the alignment of investors with a company’s mission, not it’s profit margin. This transforms the nature of investing to include vision, practice, and purpose. 

In our first article on SRI, we outlined some initial considerations about SRI, including what it means to you, how to set your criteria, and the pace at which you want to dive in.

In this article, we’ll discuss what it takes to create an investment methodology that’s sustainable not only by your definition but sustainable economically.

While SRI can seem more “fun” than “typical” investing, it still requires vigilance, planning, and strategy. We’re here to build you a strong financial plan with allocation and diversification strategies focused on your long term financial goals.

Maintain Proper Diversification

Our clients sometimes ask if there are any secrets to profitability with a socially responsible portfolio. The good news is there’s no insider’s club you have to join. But, it’s crucial to implement fundamental investment strategies and principles to create a well-balanced portfolio. 

The hallmark of any sound investment portfolio is proper diversification. A strategic commitment to balancing your fund choices and types ensures that you aren’t over- or under-exposed in certain market sectors.

In other words, while SRI may serve as your underlying focus, it’s important to pay close attention to each sector of the market. For example, if you feel strongly about avoiding companies that invest in fossil fuel extraction, consider investing in an alternative energy source that does align with your beliefs.

We advise against investing in just a few individual companies—this would be the opposite of diversification. It is extremely important to adhere to the basic tenets of investing even when trying to do it sustainably. 

Many people over concentrate a majority of their portfolio on a handful of stocks in the same industry, such as Apple, Google, and Microsoft. By chasing popular tech returns, and ignoring less familiar but consistent performing companies, these investors increase their risk exposure. 

Like any sound investment strategy, it is important to invest in companies of all sizes. A well-balanced portfolio would include companies in different sectors and countries, with a mix of equities, bonds, cash, and even real estate. 

There are sustainable investment possibilities in virtually all of these asset classes.

Prioritize (and trust in) Strong Returns

As mentioned above, socially responsible investing is becoming a household name. Even so, we often field concerns from clients considering sustainable investing worried that they have to sacrifice investment returns for the “peace of mind” that comes with investing in a socially responsible manner. 

In reality, this does not have to be the case, especially when your portfolio is properly diversified and your risk is well balanced.  You no longer have to give up performance for principle.

For example, the Morgan Stanley Institute for Sustainable Investing found that portfolios with an ESG-focus outperformed non-ESG portfolios 3.9% to 2.3% in the first half of 2020 as the world felt the weight of the coronavirus pandemic. It’s 2019 report also noted that from 2004-2018, socially conscious investing performed on par with traditional investing and provided a softer cushion in terms of risk and market volatility.

In sum, there is demonstrable evidence that you can achieve both peace of mind and profit with a socially responsible investment portfolio.

Commit to Your Portfolio Management

Socially responsible investing, while arguably a feel-good kind of investing, does not pay you back with karmically derived skyrocketing returns. It bears reminding again that all investing comes with risks, and SRI is no exception.

Keep in mind that by their nature, many SRI funds invest in companies whose technologies are promising but not necessarily profitable or proven. Proper diversification is key to balancing risk.

Also consider that while you may be actively weeding out heavy polluters, companies that employ child labor tactics, or organizations with a history of environmental degradation, you aren’t exempt from the necessary account monitoring required to maximize your returns.

While an SRI strategy is designed to help you build wealth through investments in companies that promote social, cultural, and environmental well-being, it’s vital to remain grounded in the central tenets of investing. These tenets (and tactics) include,

  • Appropriate asset allocation and asset location
  • Portfolio rebalancing when necessary
  • Tax-loss harvesting (part of a proactive tax planning process)
  • Annual review of long term goals 

Don’t go it alone

Since there’s a somewhat overwhelming number of SRI funds and options to choose from, you could benefit from professional guidance with an investment advisor. Especially as you create your sustainable investing methodology, you may want help with the initial selection of companies, funds, and allocation percentages within the context of your overall financial goals. 

Did we tell you it’s enjoyable? As you might imagine, talking about your values and what matters gives meaning to the entire process of investing and can help you look forward to our regular check-ins. 

We’ll engage you with prompts that can clarify the best approach for you, such as “what are the companies you most admire these days?” and “What global issues are you most concerned about in the world?” “What are your values?”
We’re here to help you get started and would love to share recommendations from the many choices you have for socially responsible investing funds and companies. Ready to learn more about how SRI can transform your portfolio? Set up a call with our team today.