Investing Socially: Aligning Your Portfolio and Your Values

Socially responsible investing (SRI) has grown significantly in the past several years as many investors seek to align their portfolios with their beliefs, according to a report by US SIF: The Forum for Sustainable and Responsible Investment, which indicated SRI investing grew 33% from 2014-2016. These individuals believe targeting investments that match their values may help make a positive difference in the world (or, at minimum, avoid having a negative impact).

But investing is also about maximizing risk-adjusted returns to help you pursue your goals. Ideally, you’d like to invest socially without sacrificing returns in the process. In other words, the sustainability mantra “doing well by doing good” applies to the socially-minded investor. 

"We support a client's desire to do greater good with their investing," says Joe Correnti, Director of Portfolio Construction and Guidance at TD Ameritrade. "And we'll work with them to help find a investment solution that also makes sense for their financial situation."

Social Investing in a (Biodegradable) Nutshell

This type of investing may be religious-based – there are mutual funds and exchange-traded funds (ETFs) that focus on tenets aligned with Christianity, Islam or Judaism. Many of these start by screening out stocks like alcohol, tobacco, firearms, and pornography. Additionally, environmental, social and governance funds, known collectively as ESG, may invest to promote the environment, social values like women’s education, or better corporate governance.

Measuring Value; Measuring Impact

There are numerous SRI and ESG mutual funds and ETFs covering most major asset classes, including target date, global real estate, stocks, and fixed income securities. So you could potentially make your entire portfolio ESG-based. You might also choose to invest in specific companies or sectors that focus on social and environmental issues. 

Building an SRI or ESG portfolio involves looking not only at the typical factors like your risk tolerance, time horizon, and investment objectives, but also identifying which companies or funds may support your causes. To help you with this, you may want to consider third-party research, possibly from Sustainalytics, Thomson Reuters, or MSCI. For example, the MSCI ACWI Sustainable Impact Index is designed to identify companies that earn 50% or more of their revenue from sustainable impact solutions that address one of five themes: basic needs, empowerment, climate change, natural capital, and governance.

Are There Performance Trade-Offs?

In investing there are always opportunity costs – investing in one asset means less money available for another. When investors don’t get broad market exposure they could miss out on rising sectors. In a white paper, Jon Hale, director of sustainable research at Morningstar, says sustainable investments performance is often debated, but most of the research suggests no performance penalty with SRI investing, and there could be “possible avenues for outperformance based on reduced risk or added alpha.” Hale noted for 2017, 54% of sustainable funds as a group ranked in the top half of their Morningstar Category for the year, and that the group overall has performed similarly in the past three calendar years. Of course, past performance is no guarantee of future results.

Hale notes fees for sustainable mutual funds are competitive with traditional mutual funds, but fees for sustainable ETFs are usually higher than average ETF costs.

Echoing Correnti's earlier comments, Rocio Ortega, partner and associate advisor at WE Family Offices, who has clients who want sustainable investments says investors need to evaluate SRI and ESG funds just as they would any other investment. It takes an extra step because the investment has to also align with the values and goals of the client. "Because at the end of the day, these investments have to make financial sense,” she says.