the navigator

While a company’s financial performance is obviously a major factor in determining its attractiveness as an investment, a growing number of investors are incorporating other, non-financial factors into their investment decision-making. Many investors are now examining companies through a broader lens, taking into account each potential investment’s environmental, social, and corporate governance (ESG) performance, as well as its alignment with the investor’s personal values. In this Navigator, we examine some of the common motivations for incorporating these factors in one’s investment analysis and discuss various strategies that investors may employ to accomplish these objectives. Ultimately, we believe there may be important potential benefits available to investors who take this holistic approach to deploying their capital.

Investing with Your Values

Over the past decade, few investment themes have gained more momentum than values-based investing. Since 2010, values-based investment strategies have exploded from $3.1 trillion in assets under management to $17.1 trillion in assets under management, representing a compound growth rate of 18.6%.1 What was once a niche corner of the vast investment world has become a powerful force in the business. The strength of the movement toward values-based investing has been so significant that traditional asset managers have had no choice but to take notice. Traditional asset managers such as Morgan Stanley, BlackRock, and Goldman Sachs have all developed a slew of new strategies as well as made significant acquisitions of asset managers specializing in values-based investment strategies in order to ensure they remain competitive in this growing sector of the investment market.

While it is abundantly clear that values-based investing is one of the most important movements in the investment industry in recent decades, what may be less clear to many investors is what values-based investing actually is. There seems to be a fair amount of confusion around what constitutes values-based investing, and that confusion extends to the impacts of such strategies on investment outcomes and society more broadly. Some of that confusion is undoubtedly the result of inconsistent terminology and the lack of a clear definition of values-based investing.

Within the investment industry, one is likely to come across terms such as ethical investing, socially responsible investing (SRI), environmental, social, and governance investing, sustainable investing, green investing, faith-based investing, impact investing, and others describing various types of investment strategies. While each of these terms refers to a unique type of strategy, these strategies all share a common characteristic: they incorporate investor values when assessing potential investments. To simplify matters, we use the term “values-based investing” to describe any investment strategy that considers an investor’s personal values in the investment selection process. More specifically, we define values-based investing as any investment strategy that deliberately seeks to invest in or avoid certain companies, industries, sectors, or asset classes based upon how those companies, industries, sectors, or asset classes align with one’s personal beliefs, morals, or closely-held values.

Why Invest with Your Values?

Given the above definition, the question many investors ask is, “Why would an investor incorporate their values in selecting investments?” There are several answers to this question, and they apply in varying measure from investor to investor.

Values Alignment

One reason that investors may want to employ a values-based investment strategy is to simply sleep better at night. Whether we realize it or not, we all make values-driven consumer decisions, choosing to patronize certain businesses while avoiding others according to their alignment with our personal values. However, many people simultaneously own shares in the very companies they purposefully avoid as consumers as a matter of ethics, health, and/or governance issues, failing to recognize the inconsistency in their behavior. Many investors’ portfolios are entirely at odds with the values that those same investors apply when making consumer decisions, and recognition of this fact can be uncomfortable. Values-based investing can provide investors with peace of mind, knowing that their portfolios reflect similar values that are reflected in their consumer decisions. There is even some data to suggest that this alignment can lead to improved investment outcomes, as investors who feel this sense of alignment are less likely to make poorly timed selling decisions that can lead to permanent capital impairment.2

Risk Reduction

Another reason that investors might want to engage in a values-based investment strategy is to potentially reduce investment risk. Many of the risks that a company faces are a function of the industry in which the company operates. The legal, regulatory, and operational risks that companies must manage vary widely from industry to industry, so avoiding certain industries that face outsized risks can reduce the overall risk profile of an investor’s portfolio. One example would be a tobacco company. The tobacco industry faces significant regulatory and legal risks as a result of the adverse health effects that their products have on consumers and society more broadly. While certain investors may want to invest in tobacco companies to enjoy the ample dividends they typically pay to go along with their highly defensive business model, other investors may choose to avoid tobacco companies so as to eliminate the possibility of capital impairment due to litigation, increased regulation, and/or secular industry decline.

Returns Enhancement

Investors may also follow a values-based investment strategy with the aim of enhancing returns. As the world becomes increasingly concerned about climate and environmentally-related issues, companies whose businesses align with improved environmental outcomes should benefit from policy and regulatory changes that are intended to fight climate change and environmental degradation. Green energy companies or companies involved in vehicle electrification, for example, would be likely beneficiaries of greater focus on environmental and climate related challenges. Similarly, social trends, such as healthier food choices or better healthcare delivery may lead to improved business fundamentals for companies whose products or services align with those trends.

Societal Change

Finally, some investors may decide to invest according to their values in order to help move society toward better alignment with those values. While it can obviously be difficult for an individual investor to move the needle on social change simply through his or her investment decisions, many investors acting in concert on certain issues can most certainly impact the way companies do business. This claim is supported by real-world historical examples. The first powerful example of the real-world impact of values-based investing was the widespread divestment of South African businesses in response to apartheid. The economic pain inflicted on South African businesses due to this divestment movement was a key driver of the end of apartheid, and current and future divestment movements may bring about similar changes on other social or environmental issues.

While values-based investment strategies may lead to change by starving certain businesses of capital, such strategies may also lead to change by providing cheaper capital to companies whose businesses promote positive social or environmental outcomes. Increased investor interest in certain sectors or businesses can reduce the cost of capital for those sectors or businesses, which can ultimately lead to greater growth of those sectors or businesses over time.

Challenges of Values-Based Investing

As with any investment strategy, investors who are interested in values-based investment strategies should fully understand the challenges associated with employing such a strategy. We already discussed some of the motivations that may lead an investor to engage in values-based investing, but there are additional considerations for those who want to implement such strategies. One important consideration is the reduced investment universe that results from applying values in the selection of investments. Values-based investment strategies, by definition, result in the elimination of certain investment options due to their misalignment with the investor’s value set. Arguments have been made that this reduction in investment universe must necessarily result in impaired investment returns and/or poor diversification. However, research does not support either of these claims.3,4

it is undoubtedly true that a reduced investment universe can affect diversification and returns, these are by no means necessary outcomes. In fact, studies have suggested that certain values-based investment strategies may actually enjoy greater returns than traditional strategies for some of the reasons that we’ve discussed above (e.g., reduced investment risk, societal tailwinds).5 And despite a smaller investment universe, sufficient diversification can still be attained by diversifying across asset classes, geographies, market caps, and industries. Further, the elimination of certain companies, industries, or sectors from one’s investment universe does not mean an investor must entirely forego the returns of those companies, industries, or sectors. Markets are interconnected in highly complex ways, leading to correlations in performance between various companies and industries. For example, when fossil fuel energy prices rise, energy from renewable sources becomes more attractively priced relative to energy produced from fossil fuels. Thus, the performance of companies engaged in renewable energy production is often highly correlated with fossil fuel prices. This means an investor who is environmentally focused can benefit when fossil fuel prices rise while providing capital to renewable energy companies, helping to push that industry forward.

While investors should be fully cognizant of the challenges that may accompany values-based investment strategies, these challenges can be managed and should not dissuade investors from considering such strategies, especially given the fact that values-based investment strategies have the potential to outperform many traditional investment strategies.

Where to Start?

One of the biggest challenges faced by investors who are interested in values-based investing is simply figuring out where to start. Transforming a portfolio to align with one’s values is not an insignificant task. The cornerstone of a properly constructed values-based investment portfolio is a clearly prioritized list of an investor’s most deeply held values. This list of prioritized values underlies the entire portfolio construction process. Thus, if you are interested in values-based investing, you should first establish which values you most want to be reflected in your portfolio. We have specific experience in this area that can help guide your thinking through this process.

Armed with an understanding of your values and relative priorities, your portfolio manager can then begin to identify companies and industries in which to focus your capital and those which should be eliminated from your investment universe. It is important to note that some values can be more easily reflected in a portfolio than others, and your portfolio manager can help you understand how certain values may be incorporated into the construction of your portfolio.

Investing with one’s values is an ongoing process. As economies, companies, technologies, information availability, and even an investor’s values evolve, the makeup of a values-based portfolio will likely change as well. Your portfolio manager can provide guidance and insight along the way to ensure that your portfolio continues to accurately reflect your values as the world changes, and you along with it.

Closing Thoughts

While there is certainly a lot of buzz (and confusion) around values-based investing in today’s market, the concept is hardly new. Investors have long sought to tailor their portfolios to their individual priorities, financial and otherwise. However, the huge increase in the amount of information available to investors regarding the way companies conduct their businesses, as well as the proliferation of investment products designed to appeal to investors with certain values sets, has brought values-based investing to the forefront of the investment management space. Ultimately, we view values-based investing as a way to ensure that an investor’s portfolio accurately reflects his or her various priorities. In doing so, we believe an investor has the potential to reduce risk and enhance return over the long-term while also nudging companies toward conducting their businesses in responsible and sustainable ways.

If you are interested in exploring ways to make your portfolio more accurately reflect your values, please contact us to begin this discussion.

[1] US SIF Trends Report:





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 strategy in the future, 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.