The notion of “socially responsible investing” first gained widespread attention during the 1970s, when such highly charged political issues as the Vietnam War and apartheid in South Africa led some investors to try to make sure their money didn't support policies that were counter to their belief systems. Since then, a wide variety of investment products, such as socially conscious mutual funds, have been developed to help people invest in ways consistent with a personal philosophy.
Investing with an eye toward promoting social, political, or environmental concerns (or at least not supporting activities you believe are socially harmful) doesn't mean you have to forgo pursuing a return on your money. Depending on how you define “socially responsible investing,” I believe that it allows one to further both economic interests and the greater good. In fact, my firm, RGA Investment Advisors only makes investments after screening for strict moral and socially conscious attributes that we believe are essential identifiers of truly sustainable, scalable, and defensible portfolio company.
There are many approaches to what may also be known as mission investing, socially conscious investing, green investing, sustainable investing, or impact investing. I wanted to take a moment to discuss how investors can employ these elements to make socially responsible investments for their own portfolio(s).
Screen for the Public Good
Perhaps the best-known aspect of socially responsible investing involves evaluating investments based not only on their fundamentals but also on their social, environmental, and even corporate governance practices. The process eliminates companies from an ‘investible universe’ whose products or actions are deemed contrary to the public good. Examples of companies that are frequently eliminated from these screens are those involved with alcohol, tobacco, gambling, or defense, and those that contribute to environmental pollution or that have significant interests in countries considered to have repressive or racist governments.
However, as interest in socially responsible investing has evolved, the screening process has shifted to identify companies whose practices actively further a particular social good, such as protecting the environment or following a particular set of religious beliefs.
Be an Active Shareholder
Both individual and institutional shareholders have become increasingly willing to pressure corporations to adopt socially responsible practices. In many cases, having a good social record can enhance business, making a company more attractive to investors who might not have previously considered it. Shareholder advocacy can involve filing shareholder resolutions on such topics as corporate governance, climate change, political contributions, environmental impact, and labor practices. Such activism got a boost when the Securities and Exchange Commission adopted the so-called "say on pay" rule as a result of the Dodd-Frank financial reforms. Companies over a certain size must allow shareholders a vote on executive pay at least once every three years. Though the vote is nonbinding, it could give institutional investors a stronger hand in advocating for other interests.
Explore Community Investing
Still another approach involves directing investment capital to communities and projects that may have difficulty getting traditional financing, including nonprofit organizations. Investors provide money that is then used to offer or guarantee loans to organizations that help traditionally underserved populations with challenges such as gaining access to affordable housing, finding jobs, and receiving health care. Community investing often helps not only individuals but also small businesses that may operate in geographic areas that mainstream financial institutions deem too risky or otherwise unsuitable for their investment objectives.
Invest with Impact
A recent development focuses on measuring and managing performance in terms of social benefit as well as investment returns. So-called "impact investing" aims not only to minimize negative impact and enhance social good, but to do so in a way that maximizes efficient use of the resources involved, using business-world methods such as benchmarking to compare returns and gauge how effectively an investment fulfills its goals. In fact, some have made a case for considering impact investing an emerging alternative asset class. Impact investments are often made directly in an individual company or organization, and may involve direct mentoring of its leaders. As a result, such unique investments may be more similar to venture capital and private equity (where the concept of impact investing originated) and may not be highly correlated with traditional assets such as stocks or bonds. For many years I had been actively involved with a terrific organization called Echoing Green; a impeccable example of this type of initiative. Echoing Green has provided nearly 600 promising social entrepreneurs working in over forty countries with $33 million in start-up funding, customized support services, and access to a vast global network of proven business leaders. Entrepreneurs or “fellows” involved in this program have gone on to launch, and now lead, some of today’s most important social enterprises throughout the world. Please contact me if you'd like more information on this organzation, I'd be more than happy to make an introduction with their leadership.
Focus on the Broader Picture
One of the key questions for anyone interested in socially responsible investing is whether to invest broadly or concentrate on a specific issue or area. A narrow focus could leave you overly exposed to the risks of a single industry or company, while greater diversification could weaken the impact that you might like your money to have. Even if you choose to focus on a single social issue, you may still need to decide whether to invest in a specific company or companies, or invest more broadly through the use of mutual funds whose objective meets your chosen criteria. These decisions are some of the tougher ones to make.
Unless you're familiar with the science behind a specific company's product or service, you might benefit from casting a wider net or finding a socially responsible investment advisor to help you allocate your resources. Though diversification can't guarantee a profit or eliminate the possibility of a loss, it can help you manage the amount of risk you face from a single source. Be careful when investing in mutual funds; carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Be sure to read the prospectus carefully before investing. Also, make sure your expectations are clear and realistic. Many socially responsible investments achieve solid financial returns; others may not. Though past performance is no guarantee of future results, you should have a sense of what kind of return you might expect. You shouldn't feel you have to accept mediocrity in order to support your beliefs. Monitor your investment's performance, and be prepared to look elsewhere if your investment doesn't continue to meet your needs, either financially or philosophically. The clearer you are about what you hope to achieve with your money, the easier it should be to find a suitable way to invest it.
I hope this information helps you better understand socially responsible investing and further enables you to seek out investments that meet your own socially conscious objectives. Please do not hesitate to contact me should have any questions about this article or if you are interested in discussing specifics about your portfolio.
Jason M. Gilbert, CPA/PFS, CFF
Jason Gilbert is Managing Director of RGA Investment Advisors LLC. He has over 10 years of experience in investment advisory, including portfolio construction, financial strategy, and advanced planning for high-net worth and institutional clients. He maintains an extensive background in both forensic accounting and personal finance, and serves as a fiduciary and trusted partner to his long-standing clients.