Should You Align Your Investments With Your Values?

When it comes to growing your money, sometimes what you do or do not invest in matters as much as how well your investment performs. It’s not about just risk; it’s about personal values.

In this era, we have the unique opportunity to feel good about not only our portfolio returns but also what we invested in and how we achieved those returns. That is precisely why sustainable investing is gaining in popularity as investors increasingly seek to align their investments with their personal values and seek to work with financial professionals who understand them not only as investors but also as value-driven individuals.

One way to accomplish this goal is to use an investment approach that focuses on environmental, social and governance criteria. An ESG lens considers issues such as climate change, pollution control, gender equality and diversity, human rights, and corporate board composition. ESG-aware investing pursues opportunities by managing risks associated with corporate actions, policies and trends related to things such as sustainability; environmental impact; societal and community contributions; diversity, inclusion and engagement practices; and the demonstration of sound corporate governance.

Since the 1960s, sustainable investment strategies have shifted from an exclusionary approach to an inclusionary one. Over time, this shift has broadened the supply of investment offerings to meet growing investor demand. Interest in sustainable investing accelerated significantly in the 2000s. According to a McKinsey study, assets in these types of investments grew by an estimated 38% from 2016 to 2018 in the U.S., rising from $8.7 trillion in 2016 to $12 trillion in 2018. Globally, sustainable investments total $23 trillion, which represents 26% of all professionally managed assets, McKinsey reported.

A common misconception is that sustainable investing — including ESG-driven strategies — imposes hurdles on performance. After all, aren’t most companies more motivated by profits than they are by values? You might be surprised to find out the reality is quite the contrary.
But you do not need to throw ethics and values out the window in order to achieve good returns.

The Journal of Banking and Finance reports longer-term historical performance suggests that ESG strategies have performed similarly to comparable traditional investments on an absolute basis and a risk-adjusted basis. Sustainable investment strategies, like any investments, do come with risks.

Another misconception is that demand is driven mainly by younger investors. Yet research suggests that investors across generations are interested in sustainable investing. Although millennials are apt to discuss sustainable investing with their financial advisors, other generations have expressed interest as well. A 2020 Wells Fargo/Gallup survey found that 82% of surveyed investors showed interest in choosing investments based on the environment, human rights, diversity and other social issues — if those investments provided returns similar to the market average.

One interesting case in point: Thompson Reuters, under the corporate brand Refinitiv, created an index to transparently and objectively measure the relative performance of companies against factors that define diverse and inclusive workplaces. The index ranks more than 7,000 companies globally. It identifies the Top 100 publicly traded companies with the most diverse and inclusive workplaces, as measured by 24 metrics across four key pillars: diversity, inclusion, people development, and news and controversies. Not only have these companies scored well, but the index also has outperformed the Thompson Reuters Global Total Return benchmark, demonstrating that diversity and inclusion can also lead to profitability. Perhaps values really can drive growth!

Industry professionals predict that sustainable investment choices for investors will continue to expand. In fact, some analysts predict that ESG factors could become a normal consideration of most investment strategies, particularly those intended for younger investors, who tend to expect greater transparency of their investments. In fact, it may surprise you to know that today sustainable investing accounts for about $1 out of every $4 under professional management in the U.S., according to The Forum for Sustainable and Responsible Investment.

The time is now for advisors and planners to develop our expertise in socially responsible investment and ESG investing. Although it is important to remain investment agnostic, some practitioners have chosen to specialize more in this area. Advisors recognized by organizations such as The Forum for Sustainable and Responsible Investment and Green America help consumers interested in value investing by deploying rigorous investment selection and screening processes that support optimal performance and also measure the societal and environmental impact of the firms themselves.

Becoming an advisor who is confident about using traditional vehicles but passionate about finding unconventional ways to accomplish client goals — especially if doing so better aligns with their personal beliefs — may create a significant competitive advantage.

Our role should be simple: to understand not just where a client wants to go but also who they are and what values they have so that we can examine all the appropriate options that can fit and empower them to move forward with confidence.

Brian Haney, LACP, CLTC, CFBS, CFS, CIS, CAE, is vice president of The Haney Group in Silver Spring, Md. Brian may be contacted at [email protected].