Your investment dollars are making an impact. The companies you are invested in are creating an impact on our world. The question is, does this impact align with what you hope for our world?
Sustainable, responsible and impact investing (SRI) is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns, while also making a positive societal impact.
This investment philosophy has a long history. In Biblical times, Jewish law produced guidelines about investing ethically. Similarly, Islamic texts and traditions have prohibited interest and investing in certain industries, such as alcohol and pork. In the 18th century, the Methodists started urging followers not to invest in “sin” industries like gambling, tobacco, or alcohol. Quakers soon followed and forbid investing in slavery or war efforts.
During the 1960s and 70s a range of heightened concerns—including institutional racism, warfare, environmental degradation--were increasingly taken into consideration when investing. As a form of protest against apartheid in South Africa, investors moved money out of institutions that were complicit in the racist regime. During the period from 1985 to 1990, more than 200 U.S. companies cut all ties with South Africa, which resulted in a loss of $1 billion in direct U.S. investment. In addition, many financial institutions decided to either move or sell their units in South Africa due to investors pulling out. “World opinion counts” said the chairman of Barclays Bank.
Today, investors may have a range of concerns they want to ensure their investment dollars are not supporting, such as: fossil fuels, gun manufacturing, tobacco, or pesticide use to name just a few. Alternatively, investors may have areas of interest that they want to specifically invest in, such as: corporate gender equity, labor rights, alternative energy products, or sustainable real estate.
According to one study, as of year-end 2015, more than one out of every five dollars under professional management in the United States—$8.72 trillion or more—was invested according to SRI strategies. Not only are individuals investing with impact, but foundations, universities, city and state governments, and organizations are using their investment capital to align with their mission. As you can see from the graph below, the interest in this way of investing is only growing.
Old Peak Finance offers a comprehensive approach to sustainable investing.
There are three main methods we use to do this:
1. Negative or exclusionary screens
2. Positive or impact screens
3. Community Investing
Let us take a closer look at each of these methods.
Negative or exclusionary screens
Are there industries or specific companies that you do not want to support with your investment dollars? Some examples may include:
• Fossil fuel companies in the coal, gas, and oil industries
• Gun manufacturers and retailers
• Tobacco products
First, we can help you understand what funds you currently hold. For example, we can determine what percentage of your holdings are in the fossil fuel or guns industry. Our conversations together can help us determine if you want to divest of certain funds due to their holdings, or if you are satisfied knowing only a small percentage of what you own is associated with your filters. There are many funds we can recommend that incorporate ESG screens to remove these companies from your portfolio.
Positive or impact screens
Are there industries or companies that you directly want to support because of their environmental, social, or governance values? Some examples may include:
• Clean energy initiatives
• Funds with a gender equity bias
• Sustainable real estate
While many of the direct impact funds are in the private equity space, there are still many ways we can direct your investments to make an impact in the public mutual fund or ETF universe.
By placing your cash in a community development financial institution, especially a local one, you are investing in your community and improving access to financial services to those who most need it.
Old Peak can help you find an appropriate place to save, such as Self-Help Credit Union, where you are supporting their mission of creating and protecting ownership and economic opportunity for all, or at the Clean Energy Credit Union where your deposits will be used to make low-cost loans for home solar installation, energy efficiency retrofits, and high fuel efficiency vehicles.
Additionally, there are fixed income products available that invest in a global portfolio of intermediaries and funds that finance mission-driven organizations, which blend financial, social, and environmental returns into one accessible product.
Will I be compromising returns by investing with my values?
• The research on performance of SRI funds is mixed. One Morningstar study shows slight underperformance when comparing U.S. equity open-end socially responsible and non-socially responsible mutual funds over a period of time.
Source: Charles Schwab Investment Advisory, Inc., with data from Morningstar, as of 3/31/2018. Returns represent the average annualized performance of U.S. equity open-end socially responsible and non–socially responsible mutual funds. Past performance is no guarantee of future results.
• Several other research studies have demonstrated that companies with strong corporate social responsibility policies and practices are sound investments. For example, in 2015 Deutsche Asset & Wealth Management and Hamburg University conducted a meta-analysis of over 2,000 empirical studies. They found that the majority of studies show a positive correlation between ESG standards and corporate financial performance. Another study in 2015 by Morgan Stanley looked at over 10,000 funds with sustainable screens and discovered that they usually met and often exceeded the performance of comparable traditional funds. Again, past performance is no guarantee of future results.
Are the increased expense ratios worth it?
• Many funds have higher expense ratios due to the active management of the funds. You are paying for fund managers to provide research, and create a product tailored to your values, while possibly filing shareholder resolutions on your behalf.
• The good news is that with the increase in available funds and passive strategies, fee levels have decreased. In fact, out of the 313 mutual funds that Morningstar identifies as socially conscious, 45% had lower expense ratios than their category’s average.
How does this fit within the traditional approach of investing based on asset allocation and risk profile?
• By screening out specific funds or industries, this will decrease diversification, therefore increasing risk. At Old Peak Finance, we will only recommend incorporating SRI funds if they are appropriate within the asset allocation mix that we propose for your risk profile and time horizon. Whether you want to invest 10% or 100% of your portfolio with this strategy, our recommendations will be tailored to you as an individual investor and will be aligned with your overall comprehensive financial plan.
The reality with investing is that it is risky, and outcomes are never certain. While the practice of aligning investments with values is not new, many of the SRI focused funds on the marketplace are new, and therefore have a shorter track record available to analyze. Also, there are no industry wide standards of what truly defines a sustainable investment. All of these concerns should be taken into consideration when constructing your overall investment portfolio.
As an investor, you may ask yourself “what impact do I want my investments to have?” And as advisors, we will continually ask “what impact will your investments likely have on your overall financial plan?” We want to ensure all these factors align to advance your goals.
• The Forum for Sustainable and Responsible Investment: http://www.ussif.org/
• Invest with Values: The Investor’s Gateway to Positive Change: https://investwithvalues.com/
• United Nations Principles for Responsible Investment: https://www.unpri.org/