Socially responsible investing is not a new practice, but is receiving the public’s attention in a monumental way.
Social-minded investors have propelled the responsible investing practice forward with such momentum that now one out of every five dollars under professional management is being invested according to socially responsible investing (SRI) strategies. SRI and impact investing are increasingly becoming two of the most popular and lucrative vehicles with which investors can make a positive impact on the world. On one hand this is great news as people are aligning their money with their values. On the other hand, they are going about it in a way that does not protect their assets and may set them up for failure.
To make a positive change on the world through investing first requires a sound financial footing, and any SRI or impact investing strategy must first be based on screening for financial performance before social or environmental benefit. We have to be careful, as mission-focused investing becomes more popular, that we make sure to use a financial screen first when we look at potential investments.
Investing according to SRI strategies involves investments in companies that follow environmental, social and corporate governance (ESG) criteria and avoiding companies that have negative impacts on the environment or society. Investors can also take their value-based investing one step further with impact investing, which makes proactive investments in companies that are working to effect a positive social or environmental change.
While both SRI and impact investing are mission-driven and financially focused, the screening process differs. Negative screening is a strategy used for SRI in which companies or organizations that do not align with the investor’s values are intentionally avoided. For instance, many investors exclude entities like tobacco or fossil fuel companies or organizations that do not meet diversity, workplace or environmental standards.
Positive screening is used for impact investing and involves investing in companies and organizations that actively seek to create a positive social and/or environmental benefit. Examples of positive screened impact investments include organizations that support underserved communities or address pressing issues like sustainable energy.
The power of socially responsible investing can’t be understated.
As we’ve seen recently in times when corporations have been seen to behave irresponsibly, bad press and regulatory scrutiny do not move along a resolution as quickly as when those who hold the purse strings start to make their feelings known. Investment capital runs our financial system and the more dollars in that system that are aligned with progressive values, the better impact this system can have on our world. But we’ve got to be financially prudent first; you can’t flex financial muscle if your investments are in the red.
Too often we are seeing a rush to make socially responsible investments that are not financially responsible, and this has got to stop if we’re going to have a long-standing commitment to SRI and impact investing.
With the largest transition of wealth, $30 trillion over the next decade, according to Wealth-X and NFP Family Wealth Transfers Report, from baby boomers to more socially-minded millennials, the popularity of value-based investing has skyrocketed. This only increases the importance of fiduciary responsibility. It is the duty of financial advisors, wealth managers and financial planners to ensure the screening processes not only address social impact, but also identify the strongest financial opportunities. The steady increase of impact focused investors has some advisors scrambling to catch up. If these investments are not appropriately focused, investors are at risk of making poor investment choices. Now is the time for investors and advisors to bring financial success back to the forefront.
If you are thinking about buying a car, you don’t begin your due diligence by trying out the car’s GPS system. You make sure the engine works and the tires are inflated. Once you know you have a sturdy vehicle, you can drive it to where you want to go. Portfolio companies should be looked at the same way. Before a company can make a positive difference in the world, it has to function well as a company first. Also, just as a car in good working order can be moved wherever you need to go, a profitable company can more easily pivot. It’s much easier to get a business to take on mission-oriented work than it is to make a failing business a successful one.
In order to ensure these types of investments make the competitive returns regular portfolios do, advisors need to flip the strategy. Rather than screening a company or fund for their social impact first, portfolio managers should first screen for financial viability. By first identifying the investments that will bring significant returns, investors and advisors can then screen the investments in regards to the companies’ or funds’ social, ethical and/or environmental impact.
In doing so, investors can be confident in the competitive financial success and also generate social impact. Investors should not have to risk their financial wellbeing in order to have an impact. With the right methodology investors can feel good about their investments in more than one way.