Making Your Socially Responsible Investing Choices

If you want to match your asset holdings with your beliefs, you'll first want to ask some questions.

Solar panels

News coming out of corporate America tells of a growing emphasis on social good. Facebook purchased WhatsApp, an unprofitable messaging application, with the stated goal to use the acquisition to help connect the world. CVS Caremark stopped selling tobacco products, even though they accounted for about $2 billion a year in sales.

These and other corporate moves, such as increasing diversity on corporate boards, have been made at least partly in response to a growing demand for social good that also is playing out in investing. It's not an entirely new trend, says Kei Sasaki, Regional Chief Investment Officer – Northeast, at Wells Fargo Private Bank. As far back as the 1700s, he says, concern over ethical and social issues helped drive public and investing sentiment. Rising concerns tied to women's equality and civil rights during the 1960s helped to drive a more widespread integration of social principles and investments. 

Finding your place in the trend
In today's modern markets, socially responsible investing (SRI) is an ever-evolving trend. The Forum for Sustainable and Responsible Investment cites more than 450 different mutual funds catering to environmental, societal, and corporate governance (ESG) investments. ESG is an offshoot of SRI that focuses on those three specific initiatives.

For investors who want to find ways to make their wealth plan match their belief systems, however, there's a lot more to consider than just finding a fund, Sasaki says.

"There are numerous equity strategies or even fixed-income strategies that would claim they are ESG-compliant," he says. "But it's very difficult for an individual investor to analyze these portfolios." Your relationship manager can help you identify the best way to match your beliefs to your plan, but these four considerations may help guide your path.

1. Exclusionary and inclusionary screening. Up until now, screening for SRI options was an exclusionary process — using a "negative screen," you would eliminate companies from your consideration based on the fact that they did things you didn't believe in. Now, with so much more information available, Sasaki says it's easier to be inclusionary. You can conduct a positive screen to find investment vehicles to match things you do believe in. If your passion is solar energy, for example, it may be less important to you whether a company in that realm gets good grades for the diversity on its board.

2. Consider different investment types. The number of mutual funds related to SRI has seen exponential growth, but don't forget to consider direct investing, or putting money into private equity funds that wield significant influence on companies. This strategy can often be a more effective way to further important societal or governance changes. 

"We're hearing more and more about 'impact investing,'" Sasaki says, which could take the form of investing capital into a company but making it very clear that you expect that company to do some sort of societal good with the money, such as invest in water purification efforts. If activism isn't your style, you might want to consider a municipal bond that supports a library or other initiative with societal good.

3. Know your time horizon. Investments influenced by SRI principles may take longer to pay off, depending on the type of investment, Sasaki says. This is especially true with direct and private equity investments. "It's usually very difficult to see tangible financial results overnight," he notes. "The private side is typically synonymous with illiquidity, so you have to remember if you're investing in a private vehicle you're committing to a strategic time horizon." Even with equity investments related to SRI, the things that attracted you to the company may not boost its stock value at the same rate as a positive earnings report.

4. Don't overdo it. Just like with any kind of wealth planning, you don't want to let one consideration overrun your portfolio as a whole and get you out of balance. "It's easy to get pulled into the excitement" around SRI, Sasaki says. Despite that caution, Sasaki believes strongly in the trends SRI investing is driving.

"There's an unmistakable tide of changing corporate and sovereign practices," Sasaki says. "That means there's a change in how global capital will be deployed. For an investor, the keys are related to self-discovery and planning."

Matt Harrington is Senior Digital Editor for Conversations.

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