The notion that “money talks” has been around for thousands of years, and its significance hasn’t dwindled — even in the age of talking heads, internet forums, and nonstop chatter. Consumers and investors have realized that the choices they make with their money can significantly alter corporate behavior and government agendas. This awareness is no doubt driving the movement toward socially responsible investing.
Many investors like the idea of owning shares of companies that have values aligned with their own; they find comfort in knowing that their money isn’t at odds with their beliefs. Thanks to a considerable increase in the number of financial products that facilitate this kind of investing, it has become easier for virtually any investor to achieve this peace of mind.
None of this happens automatically, however. Creating a socially responsible investment portfolio requires more than just opening a 401(k) or investing in a mutual fund.
Investor Responsibility
Unless they state otherwise, money managers have no obligation to allocate your capital based on socially responsible investment strategies. And even if you choose to keep your money in socially responsible investment funds, you’ll have to do some due diligence in the environmental, social, and governance (ESG) arena. “XYZ ESG Fund” might sound like it only makes socially responsible investments, but the SEC’s rules for fund names only require funds to invest 80% of their assets in the type of investment suggested by their names. What they do with the remaining 20% is completely up to them.
Investors committed to socially responsible investing should ensure their portfolio managers are not just giving lip service to social responsibility but instead are making investment decisions that truly align with the stated goals of the investment. Investors should also check to see whether any funds are actively engaged with portfolio companies to hold them accountable for their behavior.
In the case of individual stocks, carefully read company proxy statements before investing in shares. This will allow you to understand the managers’ incentives so you can verify everything aligns with your values. The good news? As socially responsible investment strategies have gained popularity, more companies are including “ESG Highlights” in their earnings reports and letters to shareholders. Those that aren’t following suit might not have any highlights to get excited about.
Many companies will also issue a sustainability report, disclosing social and environmental policies, opportunities, goals, and issues. Certain jurisdictions might require some level of ESG reporting, but investors, regulators, and the financial industry aren’t necessarily in agreement as to what information belongs in those reports. Until there is some sort of agreement, it’s up to you and your financial advisor to decide whether these reports are sufficient.
Dollars and Change
Modern investors have more options than ever when it comes to choosing how to allocate capital. If the trend of ESG investing continues — and we believe it will — every publicly traded company will be forced to consider the environmental and social concerns and demands of potential shareholders in its business strategy. That should result in permanent changes to corporate behavior, and it might help better the world along the way.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy”, dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment, or other professional advice. The views expressed are those of the author(s) as of the date of publication of this report and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future, and there are no assurances that any predicted results will actually occur. Because the application of ESG (environmental, social, governance) screens eliminate certain securities as investments, it may cause performance to behave either positively or negatively compared to strategies that do not apply ESG screens.
