Investing with a Purpose
Investing with a Purpose

Investing with a Purpose

 

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Nancy T. Bell
Nancy T. Bell
CFP®, CDFA™

Wealth Advisor
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Investing with a Purpose

How to get started with socially responsible investing.

What can I do about that?

It’s the question I opened with in my first article of this two-part series on Socially Responsible Investing (SRI). It is what seeps into our thoughts when we sense something’s not as it should be, whether it’s happening in our local communities – like homelessness, bullying, or economic inequality – or on a more global scale – like climate change, human rights or violence.

Sometimes, when a situation is overwhelming, the question turns from engagement to skepticism, “What can I possibly do about that?”

The good news is that many companies—big and small—are already working on solutions. And you can partner with them. Here are easy steps for getting started.

ESG Good Guys

ESG Good Guys can be defined by evaluating how well a company scores on the eighteen ESG criteria (Environmental, Social, Governance). For example, companies like Hexcel, Allbirds, and Nike focus on ESG criteria as a means to achieve a high overall ESG score. The stories below should not be construed as investment recommendations; however, they do demonstrate that “doing good” can be measured and achieved when the company focuses on the right criteria.

Every time you travel you can thank carbon fiber materials maker Hexcel. The company creates products that enable jets to cut fuel consumption, cars that are lighter and stronger, and wind turbines that are bigger and more efficient. Hexcel’s carbon fiber composites are the lightest, strongest and most flexible material available. This makes it ideal for use in airplanes where a lower weight translates into significant fuel saving, and this limits its environmental impact. A lot less fuel burned saves money and means a lot less CO2 emitted into the atmosphere. Hexcel has published sustainability reports and has a sustainability webpage. They earned a score of 9 out of 10 in Motley Fool’s 10 question framework for ESG investing.

More start-up companies now include helping the environment (or at least not hurting it) as part of their purpose. Allbirds, the San Francisco-based footwear company, just launched a new line of shoes with soles made of sugar-cane instead of petroleum. Outside of the fossil-fuel industry, the fashion industry is the largest contributor to carbon emissions, which Allbirds co-founder, Tim Brown, considers to be a “solvable problem if we put our minds to it.” He calls his company’s new material, SweetFoam™, “our biggest sustainable-material innovation moment yet.”

Nike, a more established brand in the footwear industry, has become a leader in environmental dedication, with a chief sustainability officer overseeing its many environmental efforts. Its Flyknit and Flyleather products were developed with environmental sustainability in mind. Nike signed onto a coalition of companies called RE100, vowing to source 100% renewable energy across its operations by 2025.

Companies like Hexcel, Allbirds, and Nike that focus on ESG (Environmental, Social, and Governance)1 criteria and responsible business practices are encouraging millions of us to consider how we might join them to create a synergy of sustainable practices that actually do make a difference in society and the environment2.

What You Can Do

There is power in numbers. It really is possible for you to make a difference when you join other investors by opting to make intentional investment choices, (also referred to as Sustainable Responsible Investing or SRI) of companies that have impressive environmental, social and governance attributes (ESG).

It’s not just bigger market forces driving ‘responsible investing.’ Big companies are increasingly responsive to their stakeholders who expect them to continuously strive for improvement. The pressure to adopt better business policies and processes using ESG criteria to create better products and services comes mostly through the increasing engagement of shareholders and individual investors like you. Both shareholders and debt holders of companies have ways they can express their beliefs in order to influence positive company behavior or encourage change.

Sustainable Responsible Investing is a big and diverse discipline. There are many different approaches to constructing an SRI investment portfolio. Some funds integrate a wide variety of sustainability criteria, while others may have a single theme, such as avoidance of fossil fuel investing, or avoidance of tobacco products, or investing in companies with more women in leadership.

Because this type of investing can be complex and overwhelming, I encourage a thoughtful and measured approach. Go step by step. Don’t allow pessimism or skepticism to keep you from taking these steps. If you think it’s too late to start investing in sustainable companies, consider that many are joining the ranks every day, investing with companies who are already making a significant and positive impact.

Get Started in Socially Responsible Investing in 4 Steps:

  1. 1.  First, think about what you value. What types of charitable organizations grab your interest? Are they local or global? What environmental issues are of greatest concern to you? Were you or a friend or family member adversely affected by unethical and or immoral business practices by an employer? This chart below is a great way to identify issues that are important to you. Sustainable and Responsible Investment Source: Forum for Sustainable and Responsible Investment
  2. 2.  Second, starting right now, recognize that there is a way for you to express your desire to make positive change through thoughtful investment selections. As you begin to identify and prioritize your most important causes and outcomes, you will be able to find local organizations, individual companies (stocks), and mutual funds that own quality companies that are more in alignment with your values. A great place to start is by doing an on-line search using keywords like Sustainable Investing, Responsible Investing, and ESG. New information is popping up every day and it is becoming easier to educate yourself on the latest news and strategies around SRI options.
  3. 3.  Third, decide on the best course of action to make your first SRI/ESG-focused investment. You can begin by talking with your financial advisor about what changes can be made to your current portfolio and then begin transitioning some of your holdings into investments that do a better job of expressing your values. As an example, let’s say you want to invest in clean water. Your advisor can look at your overall investment holdings, identify a specific company or a mutual fund that shares your goal, and then incorporate this investment into your portfolio.
  4. 4.  Fourth, keep in mind that while there are many good investment options to choose from with a 20-year or more history of success, many companies and SRI/ESG mutual funds are relatively new in the marketplace and are striving for improvement, not perfection. If you are approaching this on your own, as you research be aware of the potential risks and rewards of any investment choice. Scrutinize SRI options as carefully as you would any other investment. High quality investing is always the goal.

MEASURING SRI / ESG RETURNS

SRI has been around a long time. Using ESG criteria consistently to make better, smarter choices is relatively new. The investing public is still largely unaware of ESG availability and its potential to address environmental and social issues that pose a threat to all of us. If you wish to adopt a responsible investment approach, begin with a gradual shift in the selections you make: from just making money to incorporating ESG factors into your investment decisions. Evolution versus revolution as the saying goes. There are many considerations that comprise a risk-appropriate and successful investment strategy so be sure to look at the big picture as you start to change the way you invest.

As with all financial investing, one strategy or approach does not guarantee positive investment performance. Investors must first establish their goals and weigh the potential benefits of the various approaches against any relevant risks, rewards and costs.

The value of SRI is not measured only by monetary success. Your money can work for you and make a meaningful difference in the world.

 

Sources:

1 "What Is ESG Investing?" | The Motley Fool (Sep 18, 2019). The social component consists of people-related elements like company culture and issues that impact employees, customers, consumers and suppliers – both within the company and in greater society. Governance concerns how corporate management and boards relate to different stakeholders (employees, suppliers, customers, community), how the business is run, and whether corporate incentives align with the business’s success. | https://www.fool.com/investing/what-is-esg-investing.aspx

2 "The Social Responsibility of Business Is to Increase Its Profits" | The New York Times Magazine (Sept. 13, 1970). This represents a shift from the vaunted shareholder value theory (also known as the Friedman Doctrine) popularized in 1970 by Milton Friedman. Friedman argued that companies’ only social responsibility is to maximize shareholder value, in effect make money for the folks holding the stock. | http://umich.edu/~thecore/doc/Friedman.pdf

 

Tags:  ESG, Investment Strategy, Investments, Socially Responsible Investing, SRI, Wealth Management

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