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Socially discerning investing can bring both monetary and ethical rewards if done right

A 2002 photo shows a power plant in Frederickson.
A 2002 photo shows a power plant in Frederickson. Staff file, 2002

Under its various identities, sustainable, responsible, impact investing is growing rapidly as more people seek to align their personal values with their investments.

According to the U.S. Forum on Sustainable Investing, investors now emphasize social and environmental issues across $12 trillion of professionally managed assets. This represents a 38% increase since 2016. Approximately one out of every four dollars under professional management in the United States has some form of responsible investing mandate.

What exactly it means to invest in this way is up for interpretation. There is no one-size-fits-all definition or application of responsible investing. People have long been able to express their personal values by choosing to do business with or invest in companies whose products or services they felt were well aligned with their interests.

Even well before stock and bond markets evolved to today’s complexity, people were able to direct their money at or away from specific themes or causes. The Quakers were among initial proponents of exclusionary investing by avoiding any businesses related to the slave trade. Other investors have historically preferred to avoid businesses tied to perceived sins (e.g., alcohol, tobacco, gambling, pornography). In the past couple years, forms of “responsible” investing have advanced at a rapid pace partly in response to the Trump Administration pulling out of the Paris climate agreement among other policy changes.

In the 1970s and ‘80s, when a few niche investment firms began to use different principles to influence how they invest, the term was Socially Responsible Investing (SRI). This term still generally applies but has evolved in many cases to focus on Environmental, Social and Governance (ESG) investing.

Either way, SRI/ESG investing strives to use investment selection techniques that “maximize financial return while simultaneously advancing an idea, belief or cause that is important to the individual investor with the hope of changing the world for the better.” This is the definition provided in the Chartered SRI Counselor™ program, a designation that I completed in March.

While much emphasis is placed on avoiding fossil fuels or sin stocks, the SRI/ESG landscape is broader than that. Some investors are more concerned with gender diversity among boards of directors or executive management teams. Others care more deeply about corporate political contributions or labor rights.

With an SRI/ESG strategy, investors express personal values. With a personal commitment to this approach linking their values and their financial goals, investors are less likely to chase performance wherever it shifts in markets, exhibiting behavioral tendencies that often harm returns.

For a long time, while there were SRI/ESG investment funds that merited attention, there wasn’t a broad selection and they did not cover all the asset classes required to be a globally balanced investor. Today, as more demand has triggered new offerings, you can build a diversified portfolio at a reasonable cost without sacrificing return potential.

A recent Charles Schwab newsletter for advisers provided more support that an SRI/ESG-performance drag is a myth. Schwab analyzed the performance of socially conscious funds in 3-, 5-, and 10-year increments and found they were “in line with, and sometimes better than, the performance of non-socially conscious funds. And, additional Morningstar data shows that on average SRI mutual funds have slightly outperformed their non-socially conscious counterparts in the short, medium, and long terms.”

Of course, there is no free return granted just for your virtue. Making a decision with the intent to contribute to the greater good does not guarantee, or give you the right to access, better investment performance than other investors or the broad marketplace as a whole. SRI/ESG investing also requires more scrutiny from the investor to understand exactly how money managers apply filters or screens to integrate these principles in their funds.

Just because a company may be rated highly based on SRI/ESG factors doesn’t mean its stock or bonds are always available at a good price or value. You could pay a premium based on sentiment, essentially overpaying for a mediocre investment in an otherwise laudable company.

Another point that deserves attention is the general tilt of SRI/ESG funds to growth-oriented investing rather than value stocks (partly due to limited investments in the energy sector). Growth stocks have dominated value stocks in the U.S. over the past decade. Tilting this direction could be the primary reason SRI/ESG fund performance has been competitive with non-SRI/ESG funds. If history can be trusted as a guide, the cycle of market leadership will shift back from growth to value. At that point, we’ll get a better indication of the strength of relatively new SRI/ESG strategies in different market cycles.

Of course, financial returns are not the only measure of success for some investors. There are some people who would be happy accepting a lesser return than available elsewhere if it comes from a company they believe in.

Gary Brooks is a certified financial planner and the president of BHJ Wealth Advisors, a registered investment adviser in Gig Harbor.
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