Values-based investments are not one-size-fits-all
By Mark Cross-Powers
Socially conscious investing is a term we’ve become increasingly familiar with over the years, but many investors are left wondering what it actually means for them. The answer may not be as cut and dried as you may think.
It’s known by various names — socially responsible investing, impact investing and ESG investing. At their core, all are values-based investing strategies, but there are differences:
• Socially responsible investing refers to the practice of avoiding investment in companies whose businesses have negative impacts on the environment or on society.
• Impact investing targets investments in companies that are focused on making a positive impact in the community or the environment. In this case, rather than avoiding the offenders, the investor is actively seeking those companies that “do good.”
• Environmental, social, governance (ESG) investing refers to a set of standards for a company’s operations. It includes environmental, social and
governance criteria to help investors avoid firms that are vulnerable given weaknesses in any of their ESG practices.
The challenge is that the definition and criteria involved in socially conscious investing can mean totally different things to different investors. For many, it involves screening and eliminating stocks they may be opposed to, such as positions in alcohol, tobacco or oil companies. But the criteria for this screening process is not one-size-fits-all.
One investor may screen out a company that tests products on animals, while another could look at the same company and consider it an ideal candidate because it is supportive of promoting women and advocates for parity in the workplace. In this example, the same company fits two very different criteria for what constitutes a socially conscious investment.
If you want to create a custom-designed portfolio aligned with your sustainability goals, you can go about achieving this balance a few ways. However, it’s important you keep the bigger picture in mind: to save for a fruitful retirement and ensure you’re living the lifestyle you want.
One way is through developing a personalized sustainability index.
Incorporating mutual funds into a portfolio allows investors and advisors access to the funds’ sustainability ratings from a ratings company such as Morningstar. These ratings are an objective figure that quantifies how holdings in mutual funds and exchange-traded funds are handling ESG concerns.
The ratings alone provide a picture for each individual holding, but blending the ratings can create a snapshot of the portfolio’s overall sustainability index. This allows a “score” of the portfolios against individuals’ personal sustainability goals and address where improvements can be made.
No longer confined to domestic equity investment options, socially conscious strategies have expanded to include international markets as well
as fixed income, such as municipal bonds.
Municipalities, by their mandate, are engaged in socially responsible activities, including building and funding schools, bridges, hospitals, senior care facilities, affordable housing, public transportation and other infrastructure. In short, municipal bonds provide funding for projects that make communities better. Therefore, investing in municipal bonds could be a great way to add fixed income to your portfolio, diversify and remain in line with your socially conscious investing goals.
Investors can choose to screen out companies or industries that operate in areas they do not want to support. They can choose to have a positive impact on the world by focusing a portion of their portfolio on strategies that proactively invest in companies that share their goals.
Ultimately, it’s an exciting time for innovation across the socially conscious investing landscape. Companies understand that fiscal success is not mutually exclusive from achieving and addressing societal impact, while investors realize their investment choices can make an impact on the social issues they care about.
If you are considering reflecting your own values into your investments, consider what is most important to you and understand your options. If handled well, your socially responsible investments could make a difference.
Mark Cross-Powers, vice president and regional manager in New Hampshire of People’s United Advisors, can be reached at 603-222-5919.
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