Socially responsible investing is becoming more and more mainstream, although investors aren’t necessarily asking for it by name.
“Fifteen years ago it was rare to express social concerns about investing. At this point, it’s more common for people to bring up specific areas they wish to support, and areas where they don’t wish to invest,” says Gregg Daily, AIF®, manager of institutional investment accounts at Fragasso Financial Advisors. “Even if it’s not declaring ‘I want to be socially responsible in this way,’ people will say, ‘I don’t want to own companies that profit from tobacco.’ Or, ‘I don’t want to own companies that profit from the manufacture of arms and weapons.’”
Smart Business spoke with Daily about incorporating socially responsible investing into your portfolio.
What is socially responsible investing?
It has different meanings for different people. Your areas of support may be based on a combination of concerns for, and a desire to invest in, companies that are good environmental stewards, or whose practices don’t violate religious beliefs, or whose operations aren’t seen as violating human or animal rights. Sometimes those perspectives dovetail, and sometimes they don’t, so a clear understanding of what you mean by responsible investing is a critical first step.
Also, it’s easier to be socially responsible in some investment categories, such as buying stock in large U.S. companies, whose operations tend to be more transparent and easier to track, versus foreign companies or emerging market stocks, which are needed to diversify your portfolio but can be difficult to quantify. You may need to compromise. If you believe you should own international equities or foreign bonds, you probably won’t be socially responsible with everything. If you only want to invest in a socially responsible way, you may have a less diversified portfolio than you should.
How has the market responded?
At the outset, there were limited product choices. Over time a cottage industry of investment opportunities has developed around changing philosophies and social ideals, partly driven by a new generation of socially conscious investors. Again, that’s why a clear definition is important — a variety of choices and fund options cater to a wide variety of social sensitivities.
But this movement isn’t limited to younger investors. Nonprofits are much more concerned with being good capital stewards, and wish to avoid companies or sectors that are contrary to the mission of the organization.
If the point is to make money, does this kind of investing jeopardize that?
Any time you’re investing, whatever your focus, you should have a clear understanding of what or who you’re investing with. You and your adviser need to do your homework. If an organization or fund advertises itself as socially responsible but can’t provide specific definitions of how, or their criteria seems unclear, keep looking.
Then, you can determine whether this policy hampers performance. If a mutual fund buys large cap companies within a well-defined socially responsible framework, how does it do compared to other funds that buy large cap companies with no restrictions? As the movement has grown, the performance gap has narrowed. A lot of that has to do with more companies actively working to fit within this category, due to the changing philosophies and views of some corporate leaders, as well as pressure from actively engaged investors.
You don’t have to blindly assume lesser performance in exchange for being socially responsible. And if you do sacrifice some performance for greater social good, proper analysis allows you to do it from a position of knowledge, understanding all factors.
Can employers implement socially responsible investing in retirement plans?
You can’t choose for your plan participants, but if your workforce believes strongly in certain issues, you can make socially responsible options available. This probably works best for smaller or non-publicly traded companies, but it can be applied in any retirement plan where demand exists.
Leave the selection broad enough that if somebody didn’t want exposure to something that was socially responsible they wouldn’t have to have it, but if an employee did, he or she would have choices available.
Insights Wealth Management is brought to you by Fragasso Financial Advisors
