While responsible investing has been around for some time, its recent popularity boom has more companies offering socially and eco-friendly investments. For the average investor, determining the best option for your portfolio can be challenging.
What Is Responsible Investing?:Responsible investing can be traced to religious groups trying to avoid so called sin investments. In today's world, stocks commonly viewed as "sin stocks" are shares of companies that deal in liquor, tobacco, and gambling. By eliminating sin stocks, individuals could potentially feel morally comfortable with their investment decisions. These investors feel that they are supporting worthy causes while not providing support for sin companies.
Over the past few years, responsible investing has expanded from the traditional sin screen to include screens for defense, the environment, LGBT rights, and other social concerns.
How Do You Know If Your Investment is Responsible?: Everyone has a different approach to screening for responsible companies. The screening processes are referred to as negative and positive screens. When someone uses a negative screen, they are excluding companies with particular practices. For example, someone may decide that they do not like tobacco. As a result, they create a portfolio without tobacco companies.
Positive screening includes companies that meet certain criteria. With more people looking to environmentally-friendly investments, someone using a positive screen may look to firms that are leaders in reducing their carbon emissions.
Screening can become a challenge for investors. One mix may exclude companies that create a certain amount of carbon each year, while another may include some of those companies due to their activism in reducing their carbon footprint. While some investors may decide that they want to exclude companies because they do not have LGBT protections or benefits for domestic partners, others may decide that they want to invest in those companies provided they have members of the board working to change those policies.
Before you begin your research, determine your parameters. Decide if your investments should exclude companies based on your ideals or if you should include progressive companies that might be rapidly on their way to meeting your standards.
Does Responsible Investing Result In Lower Performance?: Due to its limitations, responsible investing has received the reputation of providing investors with lower returns than traditional investment styles. People who use responsible investments are thought to be putting their morals before their desire for return.
While I agree that many who utilize this strategy are doing so for moral reasons, I do not believe that they are necessarily sacrificing return. Every investment style may potentially yield a few solid options, a few poor options, and many in the middle. It is up to you, the investor, to find the strategy that is right for you. As with other investment strategies, you will want to do your research before making any decisions.
Will All Asset Classes Be Included?: If you're concerned about having a well-diversified portfolio and you want to use responsible investing, you may have to balance your morals with effort and diversification. Depending on your screening parameters and size of your portfolio, you may find it difficult to locate responsible investments for your smaller US and various international asset classes. You may also find rounding out your bond portfolio with such asset classes as high yield and international to be too burdensome.
While some of my clients want an entire portfolio of responsible investments, it is not always practical. For my clients who desire responsible investments, we discuss their portfolio goals and moral objectives. From there, we determine how much of their portfolio can include standard investments and allocate the rest to responsible investing.
Does Your Advisor Practice What She Preaches?: If you are working with or searching for a financial advisor, you may want to review his approach to responsible investing and responsible living.
I recently had a few clients come from an advisor who claimed to have a socially responsible investment firm. However, when he invested their money, he used annuities and other strategies that were not socially responsible. He explained that the annuities invest in all sort of businesses, so they likely have many socially responsible companies in their portfolio.
When you talk to an advisor about responsible investing, ask her how she defines socially/eco-responsible investing. Then ask which companies she uses for her own responsible investments. Ask how the advisor or the advisor's investments screen for social or environmental issues that concern you. Ask the advisor if all asset classes will be included, and if not, why.
Also, make sure to ask her what she is doing to lead a socially/eco-responsible business and life. If someone isn't doing much for her own business, they might not be as focused on those investments that are important to you.
In 2011, the Baltimore Business Journal awarded me second place for their "Green Entrepreneur" award, recognizing efforts I have made over the years to embrace green policies and procedures - not only for my business but for my lifestyle as a whole.Please visit our website at partnershipwm.com/eco_friendly.html to learn more about some of the things we're doing to become industry leaders in environmentally friendly practices.
The opinions voiced in this material are for informational purposes only and are not intended to provide specific advice to any individual. Consult your legal, tax, and/or financial advisor to determine what is appropriate for your situation.
No strategy can assure success or protected against a loss.
