Whether you want to be certain your investments align with your values or are looking to boost your long term return potential, responsible investing practices should be an important part of your financial toolkit.
For many years, experts believed that incorporating social responsibility criteria into investment decisions meant accepting a reduction in return potential. Yet a consensus has begun to emerge that responsibly selected investments at least match the performance of market indexes and at best actually outperform traditionally selected investments over the long run. That’s good news for everyone.
It’s still not well-understood why socially responsible investments may perform better over the long run or which types of investments create the most positive impact. But new knowledge in this area is being created constantly. So a willingness to do some careful research and an openness to new ideas – combined with a healthy skepticism, of course – can go a long way toward minting a successful values-based investor.
Fortunately, a lot has been published to help individual investors incorporate responsible investing principles into their portfolios. (Way more than we could ever share with you in a simple guide like this one!) Here’s a quick summary of some great resources.
Getting Acquainted with Responsible Investing
As nascent as the responsible investing movement is, there’s still a lot for conscientious investors to wrap their heads around. A great place to start is the website of US SIF, which contains an excellent overview of the responsible investing landscape for investors of all stripes. Explore the links on the left hand side of the page for an introduction to the theory and practice of responsible investing.
Understanding Non-Financial Risks
A big part of responsible investing is understanding the largest risks confronting our planet and how particular investments either aggravate or mitigate those risks. Yet the scope of these risks is so broad and uncertain that making sense of them as a layman is a sisyphean undertaking. Thankfully, a team of experts led by the World Economic Forum publishes a yearly report on the magnitude and likelihood of the most devastating risks we face, as well as the increasing interrelationships between them. This can be valuable information both to maximize the impact of your dollar and to protect your portfolio.
Investing Across Asset Classes
A well-constructed portfolio incorporates assets from various classes, and a responsible portfolio should incorporate its core values across all of its holdings. However, assessing an investment’s sustainability chops can be a very different exercise for fixed income securities, equity shares, and cash-like savings accounts. Boston College’s Carroll School of Management has compiled a detailed guide for climate-related investing across a wide variety of asset classes, from fixed income to equities to commodities and hedge funds.
Choosing Responsibly Managed Companies
When investing in individual companies, it’s a good idea to do some research on their business practices and stewardship of critical resources. Companies that take sustainability and responsibility seriously not only promote better values throughout society but are also likely to be better positioned for steady long term profitability. One of the best places to evaluate a firm’s commitment to building a sustainable model is their corporate social responsibility (CSR) report. This document, usually released annually, is the place where a company reports on its efforts to protect the interests of all of its stakeholders, including shareholders, employees, business partners, the environment, and the communities in which it operates. A credible CSR report should not just trumpet the firm’s PR wins, but should present a balanced view of both the company’s accomplishments and the critical challenges it continues to face. The following guide provides a nice how-to for making good use of CSR reports when evaluating investment opportunities.
If we’ve done our job, this article should have convinced you of two things: that responsible investing is still a confusing place that requires extensive due diligence, and that a wealth of high quality information already exists to educate investors and empower them to make better informed and more socially- and environmentally-conscious investment decisions.