Socially Responsible Investing — Profiting with Purpose

Investing a portion of your income to increase your earnings is a vital aspect of any financial plan. For many thoughtful investors, however, their analysis doesn’t stop at performance, or even emphasize the traditional distinctions between small and large-cap funds and the associated risk.

For these investors, there are additional considerations that rank as high as potential return. For example, what is the company’s environmental impact? Are their products or services sustainable? To what extent do they enable unhealthy behaviors, such as fast food, smoking, or gambling? And, ultimately, will I sleep better at night knowing I’m investing in an enterprise that reflects my core values?

Socially responsible investing (SRI) — sometimes referred to as ‘green’ or ‘ethical’ investing — has come a long way since the 1960s, when the Baby Boomer ethos of “peace and love” influenced many aspects of society, from reforms in education to the length of one’s hair. But what is perhaps most notable today with respect to SRI is how well many of these funds perform, and also how many are available.

Indeed, once considered a fringe strategy, 85% of today’s individual investors are interested in sustainable investing —according to a Morgan Stanley survey. And SRI is now an accepted approach to many corporate investment strategies.

At the institutional level, SRI funds are often dubbed ESG, which stands for Environmental, Social, and Governance. These are the three main categories under which funds are evaluated.

‘Environmental’ refers to the sustainable use of natural resources. Any threat to biodiversity, for example, or a large contributor to greenhouse gas emissions (i.e. global warming), would naturally preclude acceptance as ESG-compliant. ‘Social’ refers to a company’s supply chain and how they treat their workforce. Do they honor gender and racial equality, for example? Or perhaps they attempt to evade U.S. child-labor laws in overseas operations?  Governance’ takes into account the reputation of a company’s decision-makers and major stakeholders. How transparent are they? Are there ethical lapses or illegalities in their past or present that could devalue the company’s stature or success?

A surprising number of public companies today meet basic ESG standards, and most of the major mutual fund companies offer pre-packaged portfolios that represent all asset classes.  The US|SIF, a leading voice in advancing sustainable investing, recently noted that SRI assets managed by registered investment firms were up 19% since 2018, totaling $3.1 trillion! That is indeed a hugely impressive leap in the span of just four years.

Does this mean you should run out and buy shares in a wind-power plant in Finland? Or a salmon farm in Norway that claims to be changing aquaculture?

No, certainly not. The abundance of options now available for socially conscious investors necessitates some due diligence. Part of the reason for that is there exists no formal standard for evaluating ESG funds. Some ESG companies prepare “Impact Statements” that can be obtained upon request. But in the final analysis, investors will need to use their judgement in determining how aligned an ESG fund or opportunity might be with their values and outlook.

The future continues to look bright for SRI. And we especially feel our AAFP members, who are devoted to the health and welfare of individuals and families, and the communities in which they live, will appreciate exploring these investment options as part of their portfolio.





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