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Invested Interests

How to Support Worthy Companies - as Well as Find Profits - With Your Money

by Susan Johnston Taylor

Financial Frequency. myInvestments

March 2, 2020 . 4 min read

You make important consumer decisions every day. Where will you buy your morning latte? Which brand of beauty products will you choose? Should you stop at a small local organic grocery store after work or the big national chain? 

These often are driven not just by cost or convenience but also values. Maybe you prefer the local coffee house that allows you to bring your own mug, or the organic beauty brand that doesn’t test on animals. 

It’s not just spending choices that matter.

It’s also how you invest your money. 

A growing number of investment options assess the ethics of companies — what they stand for, how they operate — which lets you support them, or not, depending on considerations that go beyond how profitable they might be. 

This approach seems to be especially appealing to Millennials and Gen Z’ers.

“I think that a younger generation wants to make a difference,”

said Amit Chopra, certified financial planner and managing partner at Forefront Wealth Planning and Asset Management

The movement began as socially responsible investing (SRI), which aimed to steer you clear of  any enterprise that involved alcohol, tobacco, firearms or other vices, according to Stephan Kerby, an industry-approved SRI counselor and author of “You Are the Change: A Beginner's Guide to Socially Responsible Investing.”

“SRI has been around for some time,”

Kerby said.

“You can go back for decades.” 

SRI was typically a negative screen, meaning it factored out objectionable investments rather than identifying companies with admirable business practices. 

The new approach, called ESG (environmental, social and governance) uses a positive filter to find firms that you’d be proud to support.

“ESG may not remove a company [from a fund], but it may lower its ranking,”

Kerby said.

“It may keep companies that aren’t perfect but are moving in a sustainable direction.” 

Here’s how those three elements of ESG (a term sometimes used interchangeably with SRI) work:

Environmental:

Climate change is a growing concern for investors, and some companies are taking notice. Larry Fink, CEO of the global investment management company BlackRock, recently expressed concerns about climate change becoming an investment risk and urged companies to provide more information about their environmental practices.

Social:

This category can include issues like a company’s stance on child labor, its treatment of employees or its approach to animal welfare. The New York Times reports that animal welfare is quickly becoming a niche in sustainable investing.

Governance:

How a company is managed — and whether it has a diverse board of directors — doesn’t just assuage the conscience; it can also affect its long-term profitability.

“Statistically, if you have a board of directors with more than two women, three is that tipping point that these companies are significantly more profitable,”

Kerby said.

“How is that board of directors made up? It’s important to have this diversity on your board of directors.” 

Beyond that consideration, a CEO who is prone to making controversial comments could be an additional risk factor for a company.  

Obviously, each person will weigh these elements differently, depending on her core beliefs.

“ESG and SRI is very much about knowing your own values,”

Chopra said.

How do you know which companies fit these values? This is where things get a little murky, because

“there’s no set standard for ESG screens,”

Kerby said.

“A number of different companies do it.”

He believes that screening standards and metrics may become more uniform as the concept matures and grows in popularity. 

For now, investors and advisers can gather information from several different sources. They include the Morningstar Sustainability Rating, the U.S. SIF: The Forum for Sustainable and Responsible Investment, and Yahoo! Finance’s List of Sustainable and Ethically Responsible Companies

Jack Brill, founder of portfolio management firm Natural Investments, created the Heart Rating to evaluate mutual funds and exchange-traded funds based on their ESG performance. 

“He saw a need to really look at the value side … of this broad umbrella called socially responsible investing,”

said Carrie B. Van Winkle, a certified financial planner and SRI adviser at the company. 

Investors rely on the rating tool, which awards zero to five hearts in different areas, such as a firm’s research process and its shareholder advocacy (with five being the best). The scores come from information provided by fund managers but it’s cross-referenced with publicly available data. 

“Along with growing consumer awareness [about the things we buy], there have been many more efforts to put pressure on companies to do better,”

Van Winkle said.

“Now many companies are starting to report and be more transparent about environmental impact and social impact related to their corporate behavior.”

Chopra encourages those who are considering ESG investing to spend time mapping out priorities: what they most want to support and what they seek to avoid.

“Research matters, being very practical of what is a deal-breaker for you and what is not a deal-breaker,”

he said.

“[Create] parameters around what your rules are.” 

If you’re already invested in a 401(k), mutual fund or ETF outside of a retirement account, research your current holdings to see if they align with your priorities. Not all 401(k) plans have ESG options, but some are moving in that direction. 

As more companies vote with their wallets and choose sound ESG investments, individual investors increasingly are taking the same approach. 

It’s not just about making money anymore. 

It’s about making a lasting impact.