From a movement that once tried to punish companies for certain practices, this investment strategy seeks to reward those whose operations promote greater social good.
By Jack Ovel
For many years, socially responsible investing was focused mainly on negative screening. In other words, what you kept out of the portfolio. Personal, religious and environmental values have always played a role in that process.
Today, the popularity of a more positive approach to socially responsible investing is on the rise. The 2013 U.S. Trust Insights on Wealth and Worth survey showed that 71 percent of investors feel it is more important to invest in companies that will have a positive social or environmental impact than to boycott companies that are harmful.
On the Rise
Values-based investing accounted for $3.74 trillion, or roughly $1 out of every $8 to $9 under professional management, according to a 2012 report from the Forum for Sustainable and Responsible Investment. That is 22 per-cent higher than the $3.1 trillion noted in the forum’s 2010 report.
When weighing socially responsible investing, investors should not only look for companies with strong fundamentals, but also seek out corporations that derive rev-enue through their management of human capital, environmental stewardship and good corporate governance. These three socially responsible categories offer investors an opportunity to combine their personal values with competitive investments.
One example of valuable human-capital management can be “gender lens” investing—investments focused on improving the lives of women and girls. In many cases, companies with progressive policies toward gender equality are well managed, and often help recruit and retain top talent.
Key factors for socially responsible investing are human capital, environmental stewardship and good corporate governance.
Environmental stewardship examines the use of water, alternative energy, climate change and clean tech. Companies that are focused on sustainable efforts can be rewarded with cheaper operational costs in the future. This can ultimately benefit the investor if the company’s cost-saving technology produces a higher profit.
Understanding the Companies
Corporate governance focuses on corporate transparency, disclosure, reporting and incentives. It is important for socially responsible investors to understand the operations of a company. For these stakeholders, it is important to find a company that maintains an open line of communication with those invested in its success. Investors can determine whether a company believes in full disclosure or not by taking the time to review corporate Web sites to determine how well companies communicate with stakeholders.
The trend of values-based investing is changing the wealth management space—creating a new, more active and demanding approach to social investing.
For example, U.S. Trust developed Socially Innovative Investing (S2I), a strategy based on a growing awareness that strong corporate financial performance and social responsibility are not mutually exclusive; rather, they are mutually beneficial qualities. S2I takes traditional socially responsible investing a step further by scoring companies based on more than 400 distinct characteristics that we believe are a reflection of thoughtful management and potential sources of value.
That’s just one way wealth advisors are expanding offerings today to meet the demand for in-vestment tools that aid in socially responsible investing. Other examples include programs that support clients’ needs to align investments with the environmental, social and governance issues they care about. Such programs study and respond to increasing demand from both institutional and individual clients, offering clients a range of investment opportunities themed around their environmental or social value sets.
Ultimately, and with a balanced ap-proach, you can make a difference and make sound investments. Work with a financial advisor who understands your long-term needs and investment personality, but also understands what you value most.
Jack Ovel is U.S. Trust Regional Chairman for Business Development and Bank of America’s market president for Kansas City.
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