What is Socially Responsible Investing and does it make sense for you to consider?
It might surprise you to know that U.S. assets invested in socially responsible strategies topped $17.1 trillion at the start of 2020, up 42% from two years earlier. Sustainable, responsible, and impact (SRI) investments now account for nearly one-third of all professionally managed U.S. assets. 1
Recently I’ve had several questions about SRI Investing. While some people are interested in adopting SRI into their portfolios, others are curious to learn more about it.
I thought I would review some of the terms and approaches.
SRI strategies incorporate environmental, social, and governance (ESG) considerations into investment decisions in various ways. ESG data for publicly traded companies is often provided alongside traditional financial data by investment research and rating services. Some examples of prominent ESG issues include climate change, sustainable natural resources, labor and equal employment opportunity, human rights, executive pay, and board diversity.
The exclusionary approach (also called negative screening) allows you to steer clear of companies and industries that profit from products or activities you don't wish to finance. These choices can vary widely depending on your ethics, philosophies, and religious beliefs, but alcohol, tobacco, gambling, and weapons are some typical exclusions.
Positive screening can help us identify companies with stronger ESG track records and/or policies and practices that they support.
Impact investing is a less common strategy that directly targets specific environmental or social problems in order to achieve measurable outcomes.
An integrated approach combines robust ESG data with traditional financial analysis. These tend to be proactive and comprehensive, so they are less likely to avoid entire industries. Instead, analysts and portfolio managers may compare industry peers to determine which companies have taken more significant steps to meet environmental and social challenges, potentially gaining a competitive advantage.
The range of investment vehicles used in SRI strategies includes stocks, mutual funds, exchange-traded funds (ETFs), and, to a lesser extent, fixed-income assets. Altogether, there are more than 800 different investment funds that incorporate ESG factors, and the field is expanding rapidly.2
Many SRI funds are broad-based and diversified, some are actively managed, and others track a particular index with its own collection of SRI stocks. ESG criteria can vary greatly from one SRI fund to another. Specialty funds, however, may focus on a narrower theme such as clean energy; they can be more volatile and carry additional risks that may not be suitable for all investors.
Socially responsible investing may allow you to further both your own economic interests and a cause that matter to you. Moreover, recent research suggests you shouldn't have to accept subpar returns in order to support your beliefs.3
As with any portfolio, it's essential to establish your goals, pay attention to the composition and level of risk, and monitor investment performance. Be prepared to make adjustments if any of your holdings don't continue to meet your financial needs and reflect your values.
Call me if you’d like to talk about incorporating SRI in your portfolio or go to our Sustainable Investing Resources page to learn more.
The return and principal value of SRI stocks and funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. There is no guarantee that an SRI fund will achieve its objectives. Diversification does not guarantee a profit or protect against investment loss.
Investment funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
Any opinions are those of John T. McCaffery and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
1-2) US SIF Foundation, 2020
3) The Wall Street Journal, March 16, 2020
