When investments are about more than just the money

Larger numbers of investors are wanting to have their values reflected in their investment portfolios. There are a couple of acronyms that are used in this case, sometimes interchangeably.

ESG is investing in accord with environmental, social and governance criteria. The environmental concerns are generally around protecting the planet through reducing climate change, reducing and avoiding pollution, and use of green and/or renewable energy. Social criteria include providing a safe working environment, being a good community member and hiring a diverse workforce. Governance issues involve larger corporate actions about ethics, transparency and disparities of pay between management and line workers.

SRI stands for socially responsible investments. These investments might be ones that affect their communities in a positive way and are seen to have a constructive impact on social and political issues. This often involves avoiding companies that engage in activities that are judged to have a negative impact on the Earth or society.

The MSCI ESG ratings,

https://www.msci.com/our-solutions/esg-investing/esg-ratings-climate-search-tool, measure a company’s commitment to ESG/SRI efforts. While there has been some criticism of the effectiveness of these ratings, it’s still a good place to start if you’re interested in screening companies.

A cautionary note is that just about no company is perfect. And screening pooled investments like mutual funds and exchange traded funds (ETFs) can be even trickier. For instance, a company that makes energy-efficient batteries might rank well on environmental issues, but not be strong on having good employment practices around women and people of color. Or a company that’s good on energy efficiency and has good personnel policies around minorities may have a huge disparity in the pay scale for day-to-day workers and corporate executives.

Taking an ESG/SRI approach to investing shouldn’t mean sacrificing reasonable returns. In past years, it seemed to be a trad- off between returns and investments reflecting values. But more companies are focusing on ESG/SRI issues.

There seem to be two main reasons. One is that it’s more expected. Companies are finding that they are popular with more investors if they are responsible corporate citizens. And mutual funds and ETFs are letting the companies they hold in their portfolios know that their investors want to see returns that are created responsibly.

The other reason is that ESG/SRI goals make good business sense. Better utilizing available human capital and avoiding lawsuits from bad behavior produce profits. And clean energy is more cost effective now.

One other complication with ESG/SRI investing is that “good” values are in the eye of the beholder. This is especially noticeable in our current, highly charged political environment. What is an acceptable company approach to a social issue to one person may be in direct conflict with the values of another person. If you decide to follow an ESG/SRI investing path, get advice from someone who will follow your desires in that regard. They don’t necessarily have to agree with your beliefs, but they should be able to honor them.

Linda Leitz is a certified financial planner. She can be reached at linda@peaceofmindfin.com.

Leave a Reply

Your email address will not be published. Required fields are marked *