Is your investment portfolio a good match for your values?

It’s easier than ever to make sure your investments align with issues you care about, such as environmental sustainability or workplace diversity. Here’s how you can support causes that are important to you.

Tags: Investing, Investments, Planning
Published: December 08, 2021

Tai Aracen wants to make sure her investment portfolio reflects the causes she cares about – just like her chosen career does. Aracen runs a social impact consultancy, as well as a real estate development and construction firm that targets underserved communities.

To keep her investments aligned with her values, the Palo Alto, California, resident meets with her financial planner quarterly to make sure the stocks and funds she buys reflect a list of criteria that, she says, are “very, very important to me.” She prioritizes investing in companies that support economic equality and racial equality and justice.

Previously, she and her planner met annually, but Aracen stepped up the pace to respond more rapidly to fast-changing news cycles, as well as annual impact data from the companies she backs. “Especially in the last two to three years, a lot of companies have been much more public about what their position is on certain issues,” she says.

When Aracen doesn’t feel a company’s actions match her beliefs, she sells her stock in those firms.  

 

A new way to invest

At a time of heightened political and social awareness, more investors are taking a closer look at their portfolios to make sure their investments sync up with the issues they care about, such as environmental sustainability and workplace diversity.

Some investors have taken this trend a step further and embraced environmental, social and governance (ESG) investing – a type of socially responsible investing – as a way to shape their portfolio. In ESG investing, companies are scored on how well they perform in areas such as reducing their carbon footprint, sourcing their supply chains ethically and protecting shareholder voting rights. Investors choose companies with higher scores.

This category of investing is becoming more mainstream. nearly six in 10 respondents said their interest in ESG grew in 2020, and 19% said they began using ESG standards for the first time during the same period.

ESG investments have gotten so popular that such funds grew to a combined $2.3 trillion in assets in the second quarter of 2021, a fifth consecutive quarter showing growth, according to Morningstar. Most of the money is flowing into sustainable funds based in Europe, where the trend is strongest, Morningstar found. Equities the most popular asset class.

Although many investors, like Aracen, are motivated mainly by a desire to do good, ESG stocks and funds turn out to be profitable investments for many.  

 

How to get started

Interested in getting started? Talking with your financial advisor is a good first step.

“Challenge them,” advises Marta Ra, cofounder of Women in Sustainable Finance, a professional network for women in the field. “Tell them you would like to have a sustainable portfolio. Ask how your portfolio is invested now.”

A number of criteria are now used to evaluate companies on their ESG performance—such as the United Nations’ Sustainable Development Goals. Make sure the criteria your advisor uses match your own. If they don’t, you may find that you want to set exclusion criteria. Perhaps, for instance, you will only invest in companies if women hold 50% of the board seats, even if these firms meet your environmental standards or other social responsibility benchmarks.

However, keep in mind that “there is no single company in the world that is sustainable in all aspects,” Ra says.

Ben Leonard, a business broker who lives near Aberdeen, Scotland, works with his financial advisor to ensure his portfolio is both socially and environmentally responsible. He was especially interested in what an investment doesn’t do.

“It was important it was not investing in weapons, fossil fuels, fast fashion – anything known to have some sort of detrimental environmental impact, involved in exploitation of people with dodgy supply chains, involving sweatshops,” Leonard says.

 

What to watch out for

Although it’s tempting to accept companies’ claims at face value, watch out for exaggerated claims and “greenwashing,” Ra advises. Dig into the details about “green” companies that interest you by asking your advisor about their carbon footprint or if they are compliant with a standard such as the Paris Agreement, an international treaty on climate change, she recommends.

What if you’re invested in mutual funds? Go through the portfolio line by line, suggests Ra. “You want every fund to be explained,” she says. “You want to know the breakdown of the funds.”

Sometimes, the results of ESG investing can be disappointing. Your favorite companies or funds may not meet the high standards you’ve set. But with so many companies prioritizing ESG, that may be a temporary situation. “A company that is not sustainable today can be tomorrow,” says Ra.

 

Alternative investments may help diversify your portfolio and potentially hedge against market uncertainty. Here are two types of alternative investments to explore.