Are You Making an Impact? Socially Responsible Investing and How to Get Started

By Egan on February 18, 2021

The idea of “doing good” while building wealth is something that dates back to the 18th century in the United States, and in recent years has become increasingly important among both baby boomer and millennial investors alike. The political climate over the last four years was linked to an increase in investment dollars toward strategies that seek to have a positive impact on environmental, social and governance (ESG) matters. Additionally, experts are predicting a further interest in ESG among investors due to President Biden’s Build Back Better policy.

Whether you are already fully committed to aligning your values with your investments or are unsure how to get started, it’s important to draw the distinction that this type of investment strategy is no longer a niche, nor will it have negative financial outcomes. In fact, it has become mainstream.

The numbers

Up until recently, there was the misconception that socially responsible investing did not yield positive results, but now there is an abundance of research showing just the opposite.

The Forum for Sustainable and Responsible Investing (US SIF) published in their 2020 report on U.S. sustainable and impact investing trends that total US-domiciled assets under management (AUM) using environment, social and governance (ESG) strategies grew to $17 trillion out of $51 trillion invested in the in just the past 10 years. This represents one in three dollars of the total U.S. assets under professional management.

• In 2017, Nuveen TIAA Investments released Responsible Investing: Delivering Competitive Performance. After assessing the leading SRI equity indexes over the long term, the firm “found no statistical difference in returns compared to broad market benchmarks, suggesting the absence of any systematic performance penalty. Moreover, incorporating environmental, social and governance criteria in security selection did not entail additional risk.” It added that SRI indexes had similar risk profiles to their broad market counterparts, based on Sharpe ratios and standard deviation measures.
• The Global Impact Investing Network (GIIN) and Cambridge Associates co-produced a report in 2017, The Financial Performance of Real Assets Impact Investments. After analyzing 55 real assets, including timber, real estate and infrastructure, the authors concluded that “risk-adjusted market rates of return are achievable in impact investing, as evidenced by the fact that the distribution of impact investing fund returns mirrors the distribution of conventional real asset fund returns…” The report explains the importance of fund selection because of the wide variation in individual fund returns.
• Sustainable Investing and Bond Returns is a 2016 report by Barclays Research. To study the link between ESG incorporation and corporate bond performance, the team constructed broadly diversified portfolios tracking the Bloomberg Barclays U.S. Investment-Grade Corporate Bond Index. They matched the index’s key characteristics but applied either a positive or negative tilt to different ESG factors. Barclays Research found that “…a positive ESG tilt resulted in a small but steady performance advantage…” They did not find evidence of negative performance.

Source: https://www.ussif.org/performance

How to get started

If you found that data as compelling as us, the next step is to ask yourself some key questions before you sit down with your advisor to build a socially responsible investment portfolio.

1. Ask what is important to you

For some, socially responsible investing may look fairly straightforward, like avoiding investments connected to the sale of firearms, fossil fuels, alcohol, and tobacco. But for others, it can be much more nuanced and personal. This could include avoiding investing in companies that do not align with causes you are passionate about, such as racial and gender equity, LGBTQ rights or animal rights. The great thing about going through this process is that you will most likely be able to find out which companies don’t align with your personal values pretty easily – this is the beauty of the internet. This is also a great time to re-visit these values with your spouse if you are investing together and find out how you both can feel good about your investments.

2. Do your own research

As mentioned above, the internet is your friend when it comes to researching which companies are up to what antics. News travels very fast in our media-hungry society, so more likely than not, a quick Google search and some amateur detective skills will be able to help you uncover what large companies are supporting – even if they aren’t promoting it.

3. Loop in a financial advisor

After you’ve decided what’s important to you and where you truly want your money, it’s vital to sit down with a financial advisor. Whether you want to start a socially responsible investing portfolio from scratch or just edit your current portfolio, an advisor will be able to help – you may even find out that your investments are already “doing good.” And if you’re in need of a new advisor, reach out to us here at Egan Wealth Advisors to get started.