What You Should Know About Socially Responsible Investing.
Back in the year 2019, 85% of millennials (born between the years of 1981-1995) said that they believe it is possible for their investment choices to positively influence climate change, and 89% reported that their investment choices can create economic growth, lifting people out of poverty. My husband and I are both millennials, technically we are “elder millennials”, but really who is keeping score? And while there has been plenty of bad press for our generation, like participation trophies, there is one truth about our generation that I take pride in, our widespread interest in sustainable consumer behavior. We care about our world and the people in it.
Knowing that truth about millennials, it’s not surprising that a majority of millennial investors are taking part in socially responsible investing. Long story short, it looks like we like to support companies who have sustainable business practices and not support those companies who commit social or environmental injustices. We seem to also prefer the good guys over the rich guys.
Let’s break down what socially responsible investing actually is and how it has impacted our world so far:
Back in the 60’s labor unions and civil rights activists started using sustainable investing as a force for social change, leading to the creation of the first sustainable investing fund in 1971. Also known as SRI or a social investment, is an investment that is considered socially responsible due to the nature of the business the company invested in conducts. Typically this looks like staying away from investments in companies that produce or sell addictive products or activities (like alcohol, gambling, weapons and tobacco) in favor of companies who are engaged in social justice, environmental sustainability, and alternative energy/clean technology efforts. Socially responsible investments can be made into individual companies with a good social value or through a socially conscious mutual fund or exchange-traded fund (ETF).
One way of socially responsible investing is called community investing. This type of investing is where the return is measured on community impact rather than monetary return. The funds allow these organizations, who typically can’t garner funds from financial institutions, to provide services to their communities, such as affordable housing. The end goal is to improve the quality of the community by reducing the need for government assistance like welfare, which in turn has a positive impact on the community’s economy. Another form of socially responsible investing involves promoting racial injustice, equality and inclusion. Known as racial justice investing, it leverages both institutional and retail dollars to invest in ways that support anti-racist causes. A great example; in the 1960’s investors were mainly focused on causes such as women's rights, civil rights and the anti-war movement. The late Martin Luther King Jr played a huge role in raising awareness for the civil rights movement by targeting companies that opposed the cause as socially irresponsible. There are also companies to invest in who are committed to workplace diversity, who represent and support women, minorities, and LGBTQ+.
There are different types of socially responsible funds as well. ERG funds (environmental social and governance funds) are portfolios in which all three factors have been woven into the investment process. The equities and bonds in this fund have gone through and passed rigorous tests regarding how sustainable the company or government is regarding the ESG criteria. Professional investors often examine these portfolios through the lens of ESG factors. So, even though some ESG funds are relatively new, they’ve been able to show solid performance and resiliency in both good and bad markets. An example here would be Parnassus Core Equity Investor, which returned -17.76% over the past rough year but 6.85% over the past three years, 9.58 over five years and 11.52% over the past 10. You should also note that these types of investments tend to mimic the political and social climate of the time. Just because an investment is socially responsible does not mean it can promise a good return.
There are also Impact funds which are all ESG funds, but place equal focus on fund performance. This can be a good pick if you prefer an investment that is socially responsible but you also need a stock that performs well. Some investors even prefer faith based funds that only invest in stocks that follow Christian, Catholic or Islamic values.
But just as all things in life, there can be some downsides to being strictly socially responsible with your investments. When you limit your investment options, you leave a lot of good performing investments on the table. Microsoft for example, isn’t included in one of the largest socially responsible funds out there. One of the two managers of that fund, Todd Ahlsten, has said in an interview that they don’t invest in Microsoft because of its competitive dynamics. The definition of socially responsible investing is highly subjective, with many companies claiming to be socially responsible without actually committing to it. Just because a company says it is socially or ethically responsible doesn’t mean they are what you agree to be socially or ethically responsible. As always, speak with your advisor about which companies they recommend for you personally.
To sum it all up, socially responsible investing is just looking out for your planet and supporting the different types of people who live on it. The best way to go about ensuring you’re supporting companies and places you want to invest in is to educate yourself on their practices and talk with Oakview Wealth Solutions about what we know. And to all my fellow millennials out there…let’s keep setting positive examples for the generations to follow!
-Sylvia McCormick Burns (Co-founder Oakview Wealth Solutions)