Investing with Purpose: Best Practices for Values Investing
A five-step starter plan for making a difference
How can I make a difference?
It’s a question people are increasingly asking themselves. And more importantly, it’s one they’re acting on. From monitoring energy consumption and establishing environmental practices, to evaluating the products they purchase and the organizations they support, people are trying to leave a positive imprint however they can.
While being purposeful is not a new idea, we are experiencing a dramatic increase in how people are changing behaviors to make a difference — particularly in the investing space. According to the US SIF Foundation’s 2018 Report on U.S. Sustainable, Responsible and Impact Investing Trends, nearly $12 trillion are invested in a variety of socially responsible ways in the United States alone, which is $1 out of every $4 under professional management. It’s also a 38% increase since 2016, which clearly demonstrates this is not just a fad, but a trend with significant momentum.
And as more and more people look to investing as an extension of their social values, understanding what it is and how to start is critical.
Values investing: Something old and something new
A values approach to investing has existed for decades, but it has evolved dramatically. For years, investors have been able to request portfolios that exclude specific goods, services or connections if they engage in or support certain activities or practices. For instance, some investors would request screens for products like tobacco or alcohol.
Adding to that practice, environmental, social and corporate governance (ESG) investments include funds based on the positive impact the company’s ESG principles can have on their financial performance. This can translate to investors focusing on a company’s commitment to sustainable business practices, or diversity in the workplace.
As such, ESG investing allows investors to customize their approach by excluding and/or including funds based on their personal values.
What does ESG investing look like?
Understanding the design of an ESG portfolio is a common need for investors new to the space. The basics are simple, but the implementation can be complex, because ESG investing can look however you want. Because it’s values-based and customizable, each investor’s goals and input help design their investment strategy.
Because of this, it’s important to consider these best practices.
No. 1: Work with an ESG advisor
Experience and knowledge matter in ESG investing. Find an ESG advisor who is knowledgeable in the space and can help you decide if it’s the right option for you. They will help you determine at what investment level you want to begin, if there are specific values you want to support and/or exclude, and how an ESG strategy fits into your overall investment objectives.
No. 2: Ask about approach
Next, ask the advisor questions about their specific approach, including how they identify ESG funds. Experts in this space will have specific inclusionary and exclusionary software, along with industry knowledge, that can identify ESG qualified funds and fund managers that have overlying ESG mandates.
Advisors adept in this space can help you determine parameters as well. Do you want to focus on overall good or screen to a specific issue like water, fossil fuel use or other personal interest areas? Narrowing to specific goals adds complexity, so this is an area where an ESG advisor can provide additional value.
No. 3: Get in the details
It may seem over-the-top, but ask about your advisor’s fund review process. These investments should be managed with the same rigor as the rest of your portfolio, which means regular evaluation of the fund holdings, including the underlying funds, from both a risk perspective and an ESG screen to ensure these practices are being followed as time goes on.
Funds that cater to social and ethical values have become increasingly prevalent in the market. ESG investing is a top priority for 55% of asset managers looking to build new products for managed account platforms, according to Cerulli research from 2018.
Having an individual who is committed to consistent, methodical analysis will ensure your values investing stays in-line with your purpose and your overall investment plan.
No. 4: Request the research
Advisors should be able to provide reporting to not only see how your portfolio is performing, but also to see how it’s positively affecting the areas you’ve targeted. For example, ask if there is an annual impact report that shows key data, such as how your investment helped enact change.
No. 5: Take the next step: invest responsibly
Once all your questions have been answered and you have a clear strategy in place, put your money to work. Be confident in the due diligence you completed and take a moment to appreciate the possibilities ahead — for you personally and for the areas you have chosen to support. Not only have you made an informed and thorough investment decision, you’ve also invested with purpose.
You’ve made a difference.
Jennifer Boxberger is an assistant vice president and senior investment product analyst at UMB Bank. She can be reached at Jennifer.Boxberger@umb.com.