Planning matters

What is Socially Responsible Investing?

The last decade has seen rapid growth in the realm of “Socially Responsible Investing”, a blanket term for a wide variety of investment philosophies aimed at aligning your investments with your values. But what does that even mean and how do you get started?

Quiz time: When was the earliest use of socially responsible investing?

If you said the early 1800s, congratulations, you’re already far more advanced than most investors on this topic! Socially responsible investing, called SRI for short, is often cited as beginning with the Methodists, a group of Christians that shunned investments in alcohol, gambling, tobacco, and firearms because they believed it prevented harm to their neighbors.

If we’re talking about the United States, however, the current trend of impact investing (another name for SRI) can be traced back to the 1960s and the use of investment dollars as a way to impact the fight for civil rights. This continued in the 1970s as the environmental movement picked up and shareholders were able to get social-responsibility-focused resolutions on shareholder meeting ballots for the first time. Perhaps one of the best examples of SRI came in the 1980s-90s as the international community pressured the apartheid regime of South Africa into changing their discriminatory system by restricting investment in businesses that operated in the country.

SRI has continued to blossom since then and is now often referred to as Environmental, Social, and Governance (ESG) investing today. The graphic below gives a brief look at what the “E”, “S”, and “G” typically refer to:

A key challenge with ESG investing is finding investments that achieve ALL of these goals. Companies may score well on environmental sustainability but lack high-quality management or strong worker safety precautions. Be aware that you can’t have it all when it comes to ESG investing but your menu of options continues to grow by the year.

One question many investors ask about ESG investing is simple, “If I try to be an ESG investor, will I lose out on performance?” The initial research into performance differences has been positive but it’s also important to point out that many ESG funds have often held disproportionate allocations to the Information Technology sector compared to non-ESG funds because they more often pass typical ESG screening. This sector (think Google, Apple, Facebook, etc.) has outperformed all other sectors over the last decade, but a dip in performance in this sector may provide a real test for ESG investments moving forward.

Another common issue with ESG investing is that every investor’s definition of what qualifies as “ESG” is different. Maybe you just want to screen out companies involved in the oil and gas business? Maybe you want companies that prioritize ethical supply chains and labor practices? Many different options exist to suit investor preferences but finding a well-diversified mix of investments where every single company you hold aligns with your personal values is a very tall order. Oftentimes we will recommend that clients take some money from their investments and donate it to causes important to them as an alternative to trying to ensure they explicitly avoid companies X, Y, and Z.

We are constantly evaluating ESG investment options for our clients and are working to develop ESG portfolios for those passionate about implementing this strategy into their financial plan. If you are interested in learning more about ESG opportunities at Johnson Bixby, reach out to your planner today.

 

 

1 – https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2699610&mod=article_inline