NerdWallet: How to invest without sacrificing your values
Social values may not be the first thing that comes to mind when investing in the stock market, but there are numerous ways for investors to align their portfolios with their beliefs and passions.
Values-based investing has been around a while religious groups have a lengthy history with it but due to rising demand and better access to data, investors today have more values-based investment choices than ever before. As well, these investments often perform competitively: A 2016 TIAA Global Asset Management study concluded that investing indexes with socially responsible objectives achieved similar long-term performance as broad market benchmarks.
Here's how to align your investments with your convictions and the impact that doing so can have.
DEFINE YOUR VALUES
Think about your passions causes you support through donations or activism, religious or political beliefs and the businesses you frequent. Now, merge those values think climate-change policies, corporate diversity, human rights, animal testing or faith-based ideals into the criteria you use to select investments.
Values-based strategies go by a variety of names. There's sustainable, responsible and impact investing, as well as the confusingly similar socially responsible investing. These approaches examine company characteristics particularly those related to environmental and social issues and corporate governance practices to determine suitability for investment.
You may include, or exclude, investments based on whether they support your values. For example, you may want to exclude companies that manufacture tobacco products or to include corporations with gender equality in leadership positions.
Many mutual funds and exchange-traded funds (ETF) use one or both of these screening options.
Negative screening excludes companies based on certain values and has historically been the approach for socially responsible and faith-based strategies.
Positive screening seeks to include companies that explicitly support certain values. This approach has gained popularity in recent years among investors who care deeply about environmental, social or corporate issues.
Of the total assets under professional management in the US, more than 20 per cent or about US$8.7 trillion was invested following sustainable principles in 2016, according to a Forum for Sustainable and Responsible Investment report sponsored by the MacArthur Foundation, Bloomberg and several financial institutions.
While you could do the painstaking research to identify individual stocks that align with your values, it's often easier to choose from the mutual funds and ETFs created by investment firms.
If you have an account with an online broker, check its values-oriented offerings. For example, Charles Schwab maintains a list of what it calls "socially conscious" mutual funds and ETFs, with over 100 of the funds available on its OneSource platform. Fidelity and Merrill Edge also have tools to identify investments that support specific values.
Meanwhile, investment app Stash has 'I believe' mission-driven themes, including 'Clean & Green', 'Do the Right Thing' and 'Equality Works'. Motif Investing recently launched automated portfolios that address one of three social goals: sustainable planet, fair labour or good corporate behaviour. This is in addition to its other 'motifs' themed collections of up to 30 stocks or ETFs users can customise.
Like any investment decision, it's important to do your homework. That includes researching a fund's performance, assets and fees. Morningstar provides free sustainability ratings for about 20,000 global mutual funds and ETFs.
THE VALUE OF VALUES
Values-based investing can be a tough sell for investors who doubt their ability to make a difference, but they should not give up hope, says Janet Brown, president of FundX Investment Group, which recently launched a sustainable investment fund.
"We have to somehow get the point across that money flows can change corporate behaviour," she says.
The feeling of engagement is important, particularly because shareholder activism is a key component of impact investing. Trillium Asset Management, a firm specialising in sustainable investments, recently submitted a shareholder proposal that resulted in Tractor Supply Company committing to reduce greenhouse gas emissions. Trillium also used proposals to prompt reforms in sustainability reporting and minimum wage policies at Chipotle.
The market may seem like an unconventional place to express your values. But if finding investments that align with your values gets you more excited, engaged and invested, you should hold your convictions close as you make those decisions.
Remember, socially responsible strategies shouldn't dictate your portfolio. Aim to express your values while investing in a variety of assets stocks, bonds, mutual funds and ETFs as well as different components within each. As with all investing, diversification and risk management, remain critical within values-based investing strategies.