The Day - Sound & Country

How to get started with socially responsibl­e investing

- *https://www.morganstan­ley.com/ideas/esg-funds-outperform-peers-coronaviru­s

“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.

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 ?? Submitted photo ?? Kathleen Ringler and Jim Elliott of Chelsea Groton Financial Services assist a customer.
Submitted photo Kathleen Ringler and Jim Elliott of Chelsea Groton Financial Services assist a customer.

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