Managing your financial life is not just about money.

Socially Responsible Investing

Social Responsible Investing is defined as an investment that adds the goal of a social good of some kind to the broader investment goal of purely making money.  However, the terms ‘social good’ and ‘socially responsible’ mean different things to different people.  I’m guessing there would be broad agreement that a hypothetical mutual fund that invests in tobacco companies would not be considered a socially responsible investment.  But what is?  The good news is that there are plenty of options, so most investors will be able to find something that fits their preferences.

The most common types of socially responsible investment are mutual funds and exchange traded funds that use ‘social screens’.  The screens are meant to exclude companies that violate certain social criteria, and include companies that do not.  The name that the industry has adopted for this type of an investment is ‘ESG’.  The E, S, and G stand for the three main pillars on which the screens are based, Environmental, Social, and Governance issues.

Environmental screens are fairly self-explanatory.  Among other things they might screen out companies that pollute or contribute excessively to climate change, and include companies that make an effort to make or use sustainable products or energy.  Social screens might screen out companies on human rights issues, for example companies that partner with oppressive regimes.  You will also find consumer protection, where companies that make cigarettes, alcohol, weapons, pornography, etc. are excluded.  You might also find animal welfare, and diversity issues under social screens.  The last pillar, Governance, refers to corporate governance.  The issues here would be things like employee relations, management structure, and executive compensation.

In addition to more generic socially screened funds there are also more targeted types of social investments. Impact Investing is an investment made to generate a specific, measurable social good.  For example a person or foundation that wanted to improve the lives world’s poor might invest in microfinance or a well-drilling company in the emerging world.  Sustainable Investing would be an investment in a fund or companies that are working on sustainable energy, air quality, clean water, etc.  Community Investing invests resources in under served communities in the U.S. and abroad.  The goal is to bring low interest loans and financial services, along with healthcare and education services to places in need.  And then there is faith there is Faith-Based Investing, in which investments are made based on a set of religious principles.

Our portfolio models do not specifically call for socially responsible positions, as it’s not our job to presume our clients’ beliefs and values.  Our job is to invest our clients’ funds with that above-referenced broader investment goal of making money (and managing downside risk while doing so).  However, we want to be able to offer investments to those clients who feel passionate about certain issues, and want to express that passion with their money.  Because the number of socially responsible investments have increased significantly over the last several years, and we now feel we can incorporate ESG investments into our portfolios if specifically requested.  We want to be clear that this is NOT a blanket recommendation, simply an option for those that feel strongly about certain issues. Please give us a call if that describes you!

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