Whatever the cause you are concerned about – whether it’s human rights or the environment – your money could play a positive role in creating change in accordance with your values. This is what’s meant by values-aligned investing, which in turn encompasses several strategies.
Prominent approaches include Socially Responsible Investing (SRI), Environmental, Social, and Governance (ESG) and Impact Investing. Emulating a portfolio with values-aligned stock investments is what you will learn how to do in this course.
Identifying Your Values
Willingness to stay the course will be helped when your money is invested, not in a set of account numbers, but rather the products, services and activities that you value. Values-align investing is a powerful way to achieve this end.
You can take several strategies to align your investments with your values, including Socially Responsible Investing (SRI), Environmental, Social and Governance Investing (ESG), and Impact Investing. SRI can be a very simplistic approach, where you reject a company that does something particularly heinous, for example, making and selling fossil fuels, tobacco or chopping down rainforests. By contrast, ESG/impact investing assesses each company in a more nuanced way, looking at the degree to which it is ‘good’, within the broader framework of an overall assessment of its business model.
It is not always easy to know what your own values are so, to make the process of finding them a little easier, ask yourself whether the values of your chosen heroes – and there might be more than one – are the same as your own. It is quite likely that they are! Further, you might wish to identify one or more identifiable characteristics in yourself that your hero exemplifies.
Screening
With the realisation that their money can represent their values, that it’s possible to contribute through it, and that there are people working in their community to help make an impact with them, most people find that the majority of their values can be actualised in different ways, not just in how they interact with others but in ways that their financial resources can have an impact.
The first step to being a values-align investor is figuring out what your values are. Are there social or climate issues you feel you should look out for in order to do the right thing, whether or not that helps you make money? Maybe you just jot down a few things that are important to you – maybe you care about climate change or human rights, and want to avoid companies that have bad track records in these areas.
Metrics- and values-based screening tools facilitate investments that are ‘values-aligned’ Sin portfolios has values screen that integrates multi metrics and indicators, from supply chain issues, to footprint of operations on the environment. Screening can also be used to set parameters around impact in terms of, say, the allowed amount of carbon emissions, or the preference for firms that have diverse leadership. Screening may be a bread and butter of taking in stewardship: you may have no voice whatsoever in a space, so to keep that space in your portfolio you may add certain metrics related to governance into your screening processes.
Diversifying
After all, the investment adage to ‘never put all your eggs in one basket’ expresses the need for protection against the vicissitudes of business risk, while the smoothing of returns over time in spite of risk is the reason for the other investment adage that a ‘portfolio of diversified assets is rarely inferior to any one of its components’.
Diversify your portfolio by spreading out over several asset classes, such as stocks, bonds, real estate, and cash equivalents such as real estate investment trusts (REITs). Risks and expected returns vary across asset classes: stocks tend to have the highest volatility risk, along with the promise of the highest returns; bonds tend to have less risk and modest returns; cash equivalents, such as REITs, offer modest returns along with no volatility risk.
Be sure to be invested across the full spectrum of stock-market capitalisation (small, mid and large), sector (small, mid and large caps), duration (a measurable amount by which the value of a fixed-income investment will increase or decrease if interest rates change), credit quality/risk and duration, and then rebalance your portfolio to reflect actual performance of each.
Managing Taxes
Financial investments can be a good moral compass. Since investors can join forces and invest in environmentally and socially conscious firms, this could incentivise other firms to follow these practices so as not to lose investment dollars to others.
But investing in values could also have tax implications, which means again a little bit of homework and a really good understanding of the best ways to set it up for every possible situation. Detailing your values with a wealth advisor will help you sort through those values that are most meaningful to you, and create an appropriate asset allocation and investment portfolio.
You may well be worried about values-align investing when you know that people who care deeply about it may actually have to sacrifice some returns to accomplish the goal of managing more and more of their assets on values-align principles. What those returns look like are quite positive. Last year, a study from Oregon State University demonstrated that socially responsible investing does not cost investors anything in terms of returns or opportunity costs – and could actually enhance returns! Talking through what you care about, getting clarity and an economically optimised approach from your wealth advisor, will help to put worries about this new trend in perspective.
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