What We Do Values Based Investing

An Option for Integrating Your Principles

The idea that investors can use their own values—personal or institutional—as a guide to their investing decisions has literally been around for thousands of years. It is also referred to by a broad range of terms: socially responsible, SRI, social, socially responsive, ethical, socially aware, socially conscious, green, natural, values-based, stewardship, and mission-related investing. But the real questions are where is values-based investing today, and what does it really mean to you? RightPath™ Investments & Financial Planning welcomes the opportunity to help you answer those questions.

Values-Based Investing for Real World Reasons
By definition, investors financially support another entity—like a company or a government—in the hopes of receiving a financial benefit down the road. The activity that the entity undertakes to produce a profit on the investor's original contribution, like manufacturing shoes or selling a cleaning service, is the very same activity that produces a financial benefit to the original investor. The activity and the investment gain (or loss) are directly linked.

For decades—if not centuries—investors have made their decisions regarding which entities to support with their money on factors such as profit history, experience of their boards and so on. These fiscal factors are very important in investing decisions; however, values-based investing contends that the investor should dig even deeper.

For example, let's say an individual personally believes that it is important to support environmental protection in developing countries and takes action by making donations to a well-regarded charity working on that issue. Then, that person learns that one of the companies in his or her retirement portfolio was undermining environmental protections overseas through their business activities. That investor might feel that his or her charity donations were being undercut by the profit made through the environmentally damaging activities. Or the investor might consider that, by contributing to the charity, he or she was off-setting the ill-effects of the investment, and that's how the system works best.

Values-based investors openly address these ideas every time they make an investment decision. Obviously, both individual and institutional investors can legitimately invest with their values: just like the charity donor above, a non-profit that promotes lung cancer education may want to avoid investment of their foundation dollars in tobacco companies; after all, why make a dollar of profit if doing so simply means they are creating more work for themselves that will require more dollars to accomplish?

These kinds of considerations are the reason more and more investors are deciding to add their values to their fiduciary considerations. Of course, investing in this manner still requires all of the usual due diligence. But many values-based or SRI investors find that adding these issues to their decision-making process brings them a broad range of benefits. The good news is that doing so gets easier all of the time.

Values-Based Investing and Performance
Like any type of investing, the history of values-based portfolios does not guarantee how well they will do in the future. However, most investors do look at historical data as part of their decision-making process, and the SRI's history stacks up quite well.

Many academic studies have been conducted to examine whether or not values-based investing or SRI carries with it an inherently lower return than investment methods that do not consider values. The results of these studies are quite interesting:

• Values-based investing methods do not automatically under perform their benchmarks;
• SRI investments continue to grow faster (due to both appreciation and new investments) than other markets;
• Relative to comparable investment that do not include values-based considerations, the largest values-based mutual funds receive higher Morningstar and Lipper ratings on average; and
• Investors believe that companies that engage in corporate social responsibility and greater transparency represent a lower investment risk (research is just beginning to explore this link).

To learn about the academic studies and this issue in more detail, visit The Social Investment Forum, First Affirmative Financial Network, LLC, or SocialFunds.com.

Practical Applications of Your Values to Your Investments
If you have decided to apply your personal or institutional values to your investment decision making, you are probably wondering how to get started. Today, you can engage in SRI through five main methods:

• Avoidance investing helps you stay away from companies that engage in business activities you find undesirable.
• Proactive investing occurs when you seek out companies engaged in activities that mesh with your values.
• Shareholder advocacy is your opportunity to encourage "change from the inside" by supporting responsible corporate behavior through the shareholder resolution and voting process.
• Community investing allows you to support—through checking accounts, certificates of deposits, donations and other vehicles—the community development financial institutions that provide capital in low-income areas.
• Social venture capital invests your dollars in new businesses and technologies that you believe make a positive contribution to society.

Whether you choose to engage in one or more of these methodologies, applying any of them to your financial decisions moves you into the realm of values-based investing. Of course, you will want to keep in mind the reality of these methodologies: no company—or mutual fund, for that matter—is perfect. When you engage in SRI, you will be choosing between shades of gray, not black and white options.

Once you decide which methodologies to apply, you will also need to look at which areas of interest—or causes—you will want to include. The following list covers typical issue areas: