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, sustainable, social, socially responsive, ethical, socially aware, socially conscious, green, natural, values-based, stewardship, and mission-related investing. No matter what you call it, RightPath™ Investments & Financial Planning welcomes the opportunity to answer your questions about this growing field.
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 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
Values-based investors openly address this interaction in investment decisions. 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?
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.
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:
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:
Applying any of these methods to your financial decisions moves you into the realm of values-based investing. Of course, no company—or mutual fund, for that matter—is perfect. You will be choosing between shades of gray.