Lately I’ve gotten questions from my female clients asking what is Socially Responsible Investing (SRI) aka Sustainable Investing and how do I do it?
I think it’s interesting that women are raising the question about socially responsible investing. Did you know that in the US, women now control almost half of the estates valued over $5 million and they stand to inherit some 70% of the $41 trillion to be inherited over the next four decades in the largest intergenerational transfer of wealth the world has ever seen. By 2030, roughly two-thirds of the private wealth in the US will be held by women.
This wave of wealth is set to land in the laps of female investors who have been shown to have a more positive attitude toward social investing than their male counterparts. Half of wealthy women in a recent survey expressed an interest in social and environmental investing while only one-third of wealthy men did. 65% of women thought social, political and environmental impacts were important, as compared to just 52% of men.
Socially responsible investing is often considered by investment professionals through the lens of Environmental, Social and Governance (ESG) factors for investing. This approach focuses on the company’s management practices and whether they tend towards sustainability and community improvement.
Just as there is no single approach to SRI, there is no single term to describe it. Depending on their emphasis, investors use such labels as: “community investing,” “ethical investing,” “green investing,” “impact investing,” “mission-related investing,” “responsible investing,” “socially responsible investing,” “sustainable investing” and “values-based investing,” among others.
There are several motivations for sustainable investing, including personal values and goals, institutional mission, and the demands of clients, constituents or plan participants. Sustainable investors aim for strong financial performance, but also believe that these investments should be used to contribute to advancements in social, environmental and governance practices. They may actively seek out investments—such as community development loan funds or clean tech portfolios—that are likely to provide important societal or environmental benefits.
SRI is a framework that investors (or, often, the asset managers who put together ESG-focused ETFs or mutual funds) use when they evaluate an individual investment. It looks at how the company treats the environment (the E), whether they’re good to their employees and the people they do business with (that’s “social,” the S), and how they run the company from a logistics and leadership standpoint (aka “governance,” the G). That leaves room for a lot of contradictions, as many for-profit businesses can draw praise in one area and criticism in another. A company with progressive environmental practices might underpay workers, or one with a diverse board might do business in a much-maligned industry, such as fracking.
As awareness has grown in recent years over global warming and climate change, socially responsible investing has trended toward companies that positively impact the environment by reducing emissions or investing in sustainable or clean energy sources. Consequently, these investments avoid industries such as coal mining due to the negative environmental impact of their business practices.
Generally, companies with more women serving on the board of directors, and at the executive level have been found to generate higher financial returns than those who do not include women. And, companies with women in leadership tend to hire more female employees. All this to say, diversity is an important consideration, and gender is something that can be measured. Therefore, gender inclusion can at times serve as a proxy for other important types of diversity. Companies with the most gender diversity in leadership are 25% more likely to have above-average profits than companies with the least diverse leadership.
The US SIF Foundation’s Report on US Sustainable, Responsible and Impact Investing Trends identified $12.0 trillion in total assets under management at the end of 2017 using one or more sustainable investing strategies. From 2016 to 2018, sustainable investing enjoyed a growth rate of more than 38 percent, increasing from $8.7 trillion in 2016. More than one out of every four dollars under professional management in the United States today—26% of the $46.6 trillion in total assets under management tracked by Cerulli Associates—is involved in sustainable investing.
The record of the MSCI KLD 400 Social Index, previously known as the Domini 400 Social Index (DSI), is an indication that socially responsible investors do not have to automatically assume a sacrifice in performance for following their values. Created in 1990, the DSI was the first benchmark for equity portfolios subject to multiple social screens. The DSI is a market capitalization-weighted index modeled on the Standard & Poor’s 500 and has outperformed that unscreened index on an annualized basis since its inception. Pax, and the Calvert Foundation have touted socially responsible funds for a long time.
Morgan Stanley’s Institute for Sustainable Investing offers information on current sustainable investing topics, and states social investing has “usually met, and often exceeded, the performance of comparable traditional investments.”
The behemoth BlackRock Inc. announced its shift in January, 2020, when founder Larry Fink said it would redirect the roughly $7 trillion of assets the firm manages toward environmental sustainability and devoted his annual letter to sounding the warning on climate change, saying the evidence of the risk is “compelling investors to reassess core assumptions.” Because of it, Fink said, “I believe we are on the edge of a fundamental reshaping of finance.” BlackRock has an Impact U.S. Equity Fund, which measures social and environmental outcomes coupled with returns.
Fortunately, Moringstar.com does a great job of rating mutual funds and ETFs, although ratings aren’t yet available on all funds and ETFs, mostly due to lack of history. Morningstar uses a scale of one to five stars, based on performance, risks, and costs. Ratings for three-, five- and 10-year periods are combined into an overall rating.
Here are five of the 25 most popular SRI funds for your consideration.
- Allianz Global Water Fund (AWTAX)
- Green Century Balanced Fund (GCBLX)
- iShares MSCI KLD 400 Social ETF (DSI)
- Parnassus Core Equity Fund (PRBLX)
- Calvert Global Water Fund (CFWAX)
You have many choices in ESG investing. ETFs and mutual funds make it easy to diversify your investments within any category, and they are a great way to begin your socially responsible investing.
Kristin Hull launched Nia Global Solutions in 2013 to bring activism and impact investing into the public markets. In doing so, she developed Nia’s six solutions-focused investment themes, weaving a gender-lens throughout the investment thesis.
Ellevest’s Impact Portfolios help you reach your goals by investing in companies that advance women.
As you choose which mutual funds to invest in, you’ll need to decide which factors fit your beliefs best. Let’s take a look at some of Benzinga’s favorite socially responsible mutual funds currently available for new investors.
- iShares MSCI KLD 400 Social ETF (DSI)
- SDRP S&P 500 Fossil Fuel Reserve (SPYX)
- Vanguard FTSE Social Index (VFTSX)
- SPDR SSGA Gender Diversity Index (SHE)
- Eventide Gilead Fund (ETGLX)
- TIAA-CREF Social Choice Bond Fund (TSBIX)
As public concern for and awareness of social injustices and the environmental impact of corporations reaches an all-time high, investing in companies that do more to care for employees and their families, control pollution and serve their communities can be a sustainable and profitable investment strategy. For example, as new government restrictions are placed on coal mining, investing in companies working to develop clean energy reflects bright long-term financial prospects.
However, investors need to treat these socially responsible funds with the same level of scrutiny as when investing in any other stock, bond or mutual fund. Don’t assume that just because a mutual fund bills itself as “socially responsible” that it will adhere to your specific values. Before you invest, research the fund’s criteria for asset selection. Some fund managers are much more strict when it comes to inclusion than others. Finally, don’t abandon what you’ve learned about investing just because a fund aligns with what you believe is right.
A poorly-managed mutual fund does little to help the communities it seeks to serve and even less for your long-term financial goals.
If you have more questions on Socially Responsible Investing, please contact me at linda@lindalingo.com.
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