How to get started with socially responsible investing
“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where,”said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“So long as I get somewhere,” Alice added as an explanation.
“Oh you’re sure to do that,” said the Cat, “if you only walk long enough.”
- Alice in Wonderland
Iwas recently asked, “How do I get started with Socially Responsible Investing (SRI)?” My simple response was to consider working with a financial advisor who puts your best interest first. Create an investment strategy that will honor your values and act as a guide along your journey to whatever your investment goal may be. If your employer offers some type of defined contribution plan, check to see if any of the investment options fit the ESG criteria.
The book The Foundations and History of SRI states: “SRI advisors are known for ‘getting’ their clients because they need to go beyond the basic financial considerations and need to incorporate clients’ life goals, passions, values, and beliefs into their financial plans. It becomes more about why the clients want to invest in a certain way rather than in what they wish to invest.”
According to a 2019 Morgan Stanley study, 85 percent of individual investors surveyed were interested in sustainable investing, up 10 percent from 2017. This is not a trend. This is a way of investing that allows individuals, businesses, foundations, and many other organizations to have an impact on the world and also in their portfolios. Below are four steps that will provide you with a roadmap to get started on the road to SRI:
STEP 1
ESTABLISH TRUST. The first and most important step to getting started is establishing trust with your financial advisor. The foundation of any good relationship is based on trust. Once trust has been established between the financial advisor and their client, there are conversations that need to take place before an investment recommendation can be made.
Together, you will establish goals and objectives by gathering data. To help a client be as successful as possible, a good advisor needs to ask appropriate questions, for example, What are your financial goals? What’s your risk tolerance and timeline? How is your liquidity?
When adding SRI investing, the advisor and client need to work together to focus on what is important to them by uncovering what their beliefs and values are. Consider what ESG issues are important to you, whether it is an ethical concern, has an environmental impact or both. There are many options available to meet your investment philosophy and purpose. You can still invest for retirement while having a positive impact on the environment.
A few examples of ESG criteria and strategies, according to the US SIF Foundation, that may be worth considering depending on your passions, interests and goals, are:
• Environmental: Green Building/Smart Growth; Climate Change/Carbon; Clean Technology; Pollution/Toxics; Sustainable Natural Resources/ Agriculture; Water Use and Conservation
• Social: Workplace Safety; Labor Relations; Workplace Benefits; Diversity and Anti-Bias Issues; Community Development; Avoidance of Tobacco or Other Harmful Products; Human Rights
• Governance: Corporate Political/Contributions; Executive Compensation; Board Diversity; AntiCorruption Policies; Board Independence
• Positive/ best-in-class screening: Investment in sectors, companies or projects selected for positive ESG performance relative to industry peers. This also includes avoiding companies that do not meet certain ESG performance thresholds.
• Negative/exclusionary screening: The exclusion from a fund or plan of certain sectors or companies involved in activities deemed unacceptable or controversial.
• ESG integration: The systematic and explicit inclusion by investment managers of ESG factors into financial analysis.
• Impact investing: Targeted investments aimed at solving social or environmental problems.
• Sustainability themed investing: The selection of assets specifically related to sustainability in single or multi-themed funds.
According to the US SIF
Foundation,
“the number of investment options that consider environmental, social and corporate governance (ESG) issues as a way to manage risk, achieve financial outperformance and address the ESG priorities of individuals has grown rapidly. Total US-domiciled assets under management using ESG strategies grew from $12.0 trillion at the start of 2018 to $17.1 trillion at the start of 2020, a 42 percent increase. During that period, the number of mutual funds utilizing an ESG strategy increased 13 percent to almost 720 funds.”
STEP 2
DEVELOP A PLAN. The plan should both meet the client’s objectives and provide the client and advisor with a guide to success. Whether your objective is to invest in SRI or not, all clients should have an investment roadmap. If you are passionate about investing in companies that are focusing on lowering fossil fuels or clean energy, there are thematic portfolios that can specifically help you meet your goals.
STEP 3
ALL PLANS SHOULD BE MONITORED. In a client’s portfolio that integrates ESG performance, specific evaluation is usually measured against a weighted benchmark, such as the MSCI ESG Index Series.
In 2021, the Morgan Stanley Institute for Sustainable Investing released a study, Sustainable Funds Outperform Peers during 2020 Coronavirus.* The Institute found that in a year of extreme volatility and recession, funds focused “on environmental, social and governance (ESG) factors, across both stocks and bonds, weathered the year better than non-ESG portfolios.” The research analyzed more than 3,000 US mutual funds and ETFs, finding that sustainable equity funds outperformed non-ESG peer funds by a median total return of 4.3 percent in 2020. Meanwhile, sustainable taxable bond funds over the same period outperformed their peers by a median total return of 0.9 percent. In 2019, both sustainable equity funds and sustainable taxable bond funds also outperformed their traditional peer funds. It should be noted that past performance is not a guarantee of future results. There is no assurance that such investments will outperform other investments. Limiting investment selection may lead to underperformance relative to the broader market.
Morningstar partnered with Sustainalytics to launch the Morningstar Sustainability Rating for more than 20,000 mutual funds and exchange-traded funds (ETFs). There are two components to their rating: the ESG scores developed and assigned by Sustainalytics and ESG controversies. Each company is assigned a score from 0-100. A score of 50 is considered average when compared to its peer group.
How do you measure the impact performance? When incorporating ESG investments, some additional considerations need to be used to measure the impact of those investments. In 2016, the Impact Management Project, a multi-stakeholder initiative, was established to develop a consensus on the principles and procedures regarding impact expectations. The project has identified five dimensions of impact: what the impact is, how much impact occurs in a specific time period, who is affected, the contribution of the impact, and risk factors involved.
STEP 4
PLAN YOUR NEXT REVIEW. Set expectations for review meetings. Depending on how the advisors’ practice is structured will determine the minimum amount of meetings that need to take place based on industry standards.
Incorporating SRI into your financial plan, working with an advisor to help prioritize goals, and figuring out where “there” is while making sure your investments are in line with your values is all part of the investment journey. Do not be like Alice - create a strategy that will get you to where you want to go! If you’re interested in learning more about socially responsible investing, and to see if it could fit into your overall investment strategy, contact Kathleen Ringler, Chelsea Groton Vice President, Infinex Investments, Inc. Financial Advisor, at 860-572-4047.
About Chelsea Groton Financial Services Investment and insurance products and services are offered through INFINEX INVESTMENTS, INC. Member FINRA / SIPC. Chelsea Groton Financial Services is a trade name of Chelsea Groton Bank. Infinex and the Bank are not affiliated. Products and services made available through Infinex are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value.