With the dawn of the 401(k) and the decline of the traditional pension, many workers today are charged with the responsibility of making investment decisions for themselves. These choices are often made with a goal in mind like planning for retirement, paying for college or maybe shorter-term goals like saving for a house down payment. They can also make an impact on the world when you choose SRI, an investment strategy that seeks financial gains while also promoting positive environmental, societal, and corporate governance changes.
SRI is an acronym that stands for Sustainable, Responsible, Impact investing or sometimes referred to as Socially Responsible Investing. It is an investment strategy that makes a conscious effort to consider how corporations are having either a positive or negative impact on people, communities, and our natural environment. Sustainable, responsible, socially conscious, impact, green investing – these are all words that may be used to describe SRI. By choosing to align with companies and organizations that support your values, your investment dollars could make a difference.
Sometimes the acronym ESG is used as a synonym for SRI, but it really deserves its own category as a specific type of SRI investing. ESG stands for Environmental, Social and Governance, and is a methodology that embraces sustainability factors as a means of identifying companies with best practices. The same thing is true for the term impact investing, also a specific SRI strategy. We’ll be going into more depth about both these philosophies later.
SRI is also not to be confused with venture philanthropy. Maybe you’ve heard about the super-size gifts from techno-tycoons like Bill Gates or Mark Zuckerberg who donate billions to non-profit organizations or charities. Venture philanthropy is a gifting strategy that enables those with the means to do more with their donation dollars while minimizing the taxes owed. Stacking charitable deductions, using appreciated assets, donor-advised funds, or giving directly from an IRA are all strategies that venture philanthropy can employ to help a community, see a wrong righted, or give back to a meaningful cause.
SRI uses a different set of strategies because it has a different objective. The goal of SRI is to invest your money towards reaching your financial goals while at the same time achieving the non-financial goals of reflecting your values and promoting positive change.
We invest money to make money – that’s a simple fact.
The primary goal of Sustainable, Responsible, Impact investing is to earn market returns, but for some investors, their non-financial goals may also be very important. Can SRI investments meet both goals and remain a viable and competitive option in the marketplace today?
During the last 30 years, the investment industry has seen a boom in the use of SRI strategies, so much so that it’s now become part of global, mainstream investing. Demand for SRI is on the rise as more and more people realize the power they have when aligning their dollars with an organization’s intent. In the U.S., there’s now more than $12 trillion invested in SRI strategies – or about 25 percent of total assets under management in the U.S.1
Source: “Report on US Sustainable, Responsible and Impact Investing Trends”, US|SIF Foundation, 2018
This interest has multiplied the options available. Unlike 25 years ago, today’s investors may choose from hundreds of SRI mutual funds and exchange-traded funds (ETFs). Nearly all equity asset classes are represented with all U.S. capitalization sizes – i.e., small-cap, mid-cap, large-cap stocks – plus international and emerging markets. Offerings within fixed income securities represent a growing area of SRI investing, allowing investors to finance projects that reduce the environmental impact of industry.
There is a clear demand for SRI, but how do its investments perform when it comes to meeting the primary goal of earning returns? A growing body of academic research suggests that choosing SRI investments has not had a negative impact on investment performance. A 2016 review of academic studies conducted by the independent researcher Morningstar found that sustainable funds and indexes perform on par with conventional funds.2 The Morgan Stanley Institute for Sustainable Investing found that sustainable funds provide both financial performance and lower downside risk.3
Median Total Returns of Sustainable and Traditional Funds, 2004 to 2018
Source: “Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds,” Morgan Stanley Institute for Sustainable Investing, 2019.
If SRI investments have performed just as well as non-SRI investments, that begs the question, how well has SRI met its non-financial goals? Can your investment choices really make a difference?
They can when done en masse. Again, the financial industry has seen a significant influx of money going into SRI investments with 38 percent growth since 2016.4 This demand is driven in part by millennials – individuals reaching young adulthood in the early 21st century. Women are also big supporters of SRI, which is significant given they now hold more than half the personal wealth in all the U.S., as of 2015 a total of $14 trillion, and this amount is expected to grow to an estimated $22 trillion by 2020.5
These two emerging investor groups – millennials and women – could soon control upwards of $30 trillion in assets.6 Imagine the change that could happen if we decided collectively to only invest in companies that were good stewards of the earth, upheld gender equality, and treated their employees and communities well. Companies that don’t follow fair and sustainable practices could lose out on more than half the population of investors, and their stock prices could drop. Investors should not underestimate their power.
By choosing SRI strategies, you choose to put your capital toward companies that support your values and address concerns important to you. How well SRI investing achieves these non-financial goals depends on the philosophies and strategies used. If you’re not familiar with these strategies, keep reading. What follows are six of the most common options offered in the market today.
Negative screening is perhaps the easiest strategy to understand: your values are represented by what you choose not to invest in. Negative screening is the exclusion of sectors or companies involved in activities or industries deemed unacceptable or controversial. Your impact is felt by the dollars you withhold. For example, you might exclude all companies that manufacture, distribute, and sell sporting firearms, weapons, and guns.
ESG investing is a philosophy and methodology. It emphasizes environmental, social, and governance as the main criteria for gauging the sustainability of an investment. It does this by explicitly including the following ESG data into investment decisions:
These non-financial factors are considered alongside the goals of avoiding undesirable behaviors or reducing portfolio risk.
Positive or theme investing is the opposite of negative investing in that investments are selected that specifically relate to what is deemed positive or sustainable. For example, you might invest your dollars only in companies that utilize renewable energy, producing no greenhouse gas emissions from fossil fuels. Companies that endorse the CERES Principles (Coalition for Environmentally Responsible Economies) have formalized their dedication to environmental awareness and actively commit to an ongoing process of continuous improvement and systematic public reporting.
Another component of this strategy is to employ gender lens investing. A gender lens incorporates gender-based considerations to accomplish the goals of improved returns, reduced risk, and the promotion of gender equality. It typically means using your capital intentionally to benefit the advancement of women or girls. For example, you might choose to invest in loan programs that support women entrepreneurs in developing countries, or you might want to invest in companies that are working hard on gender equality and have more than one woman on the board and have equal representation in senior management.
Shareholder Advocacy or Activist investing focuses on the rights of shareholders to bring about change to a company’s policies and operations. As a shareholder, you become eligible to vote by proxy. Shareholder resolutions and proxy voting are tools used by some funds to influence a company’s decisions to take action on certain issues. Meaning, if large numbers of like-minded individuals purchase shares and/or obtain seats on the company’s board, then change can happen.
Although making an impact is certainly the goal by definition of SRI, impact investing has a specific focus. It invests globally in companies whose services or products target specific problems or challenges to generate positive, measurable impact alongside a financial return. Global examples of impact investing include the provision of credit services, education, and healthcare to poor women in small, developing countries. It can also mean the development of bilingual communities in the United States.
Can that be done without sacrificing performance? Over 90% of respondents of the 2019 GIIN investor survey on impact investing reported portfolio performance in line with or exceeding both their impact and their financial expectations.7 In general, impact investing places more emphasis on the achievement of positive impact than on earning a market rate of return.
Performance Relative to Expectations:
Source: “Annual Impact Investor Survey,” Global Impact Investing Network, 2019
Sometimes called faith-based investing (FBI) or faith-based funds, this strategy is generally considered to be the origin of SRI investing. You might think of it as a form of negative investing that screens out companies that engage in activities that are not consistent with a set of religious beliefs. It is also like positive investing in that it includes firms whose activities do not violate the tenets of a given religion.
SRI investments are well represented in the form of mutual funds and ETFs. Both are pooled investments that provide investors with similar goals to benefit from a more diverse set of investments that may lower risk. Mutual funds and ETFs may invest in a number of different securities, such as stocks, bonds, and money market securities.
These are not the only strategies for SRI Investments. What follows are additional strategies and a brief overview to help you understand how they work. These strategies generally require additional due diligence on the part of the investor and may enter into a level of sophistication that is not appropriate for all investors.
Working with a financial advisor can help you navigate the ever-expanding landscape of SRI investments to figure out which strategies can best help you meet your financial and non-financial goals.
Start by asking your advisor these three questions:
A fiduciary is required by law to always put your interests ahead of theirs, meaning they must in good faith only recommend products and strategies that are in your best interests.
To figure out what investment strategy will best support your goals, an advisor should take the time to get to know you. This includes an understanding of your values and what’s important to you as well as what resources and opportunities you have available. In other words, before you invest with an advisor, an advisor should first invest time in getting to know you. Only then can they put together a customized plan capable of helping you reach your goals.
Because SRI investments have more than one goal, we believe the best way to judge performance is to look at how well you are tracking toward the attainment of your specific goals. To measure that usually requires that both you and your advisor meet regularly to track progress and take the actions modeled by the plan you’ve outlined together. Your advisor should be able to share information regarding your specific investments and how your assets are reflecting your values and what’s important to you. If you are uncomfortable with a particular investment, it is important to discuss it with your advisor and, if necessary, request options for replacing that security in your portfolio.
If you choose to build a portfolio of SRI investments on your own, find reputable sources of research on SRI investments. Avoid making an investment based on an advertisement. Remember that you are building a portfolio of investments and you should pay close attention to variables like investment costs, expected risk, correlation of investments and the quality of the team managing the mutual fund or ETF.
If you are interested in wielding your financial power, then SRI investing might be right for you. Sustainable, Responsible, Impact investing represents a complex landscape of opportunities that can support your financial goals while representing your values. By strategically aligning your investments with entities that promote environmental or social justice goals and demonstrate good corporate governance, it’s possible to save for retirement and make a positive difference in the world.
It might take time on your part to do your homework and find the strategy that fits, but everyone with a savings goal needs to learn how to navigate their financial choices. You don’t have to sacrifice investment performance – or your retirement – in order to invest responsibly.
1. “Report on US Sustainable, Responsible and Impact Investing Trends.” US|SIF Foundation, 2018. https://www.ussif.org/files/Trends/Trends%202018%20executive%20summary%20FINAL.pdf
2. “Sustainable Research Suggests No Performance Penalty,” Morningstar, November 2016. https://www.morningstar.com/articl.es/779758/sustainable-investing-research-suggests-no-performance-penalty
3. “Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds,” Morgan Stanley Institute for Sustainable Investing, September 2019. https://www.morganstanley.com/pub/content/dam/msdotcom/ideas/sustainable-investing-offers-financial-performance-lowered risk/Sustainable_Reality_Analyzing_Risk_and_Returns_of_Sustainable_Funds.pdf
4. Sustainable Investing: The Millennial Investor,” Investments & Wealth Institute, March/April 2019. https://investmentsandwealth.org/getattachment/bbdef004-2fe8-4e71-a445-918a270b5ff7/IWM19MarApr-TheMillennialInvestor.pdf.
5. “Financial Concerns of Women,” The BMO Wealth Institute, US Edition, March 2015. https://www.bmo.com/privatebank/pdf/Q1-2015-Wealth-Institute-Report-Financial-Concerns-of-Women.pdf.
6. “Sustainable Research Suggests No Performance Penalty,” Morningstar, November 2016. https://www.morningstar.com/articl.es/779758/sustainable-investing-research-suggests-no-performance-penalty
7. Search Fortune 500, Fortune 500 List 2019. https://fortune.com/fortune500/2019/search/?ceowoman=true