When you purchase stock or other forms of equity, you’re providing financial support to the company that issues it. Publicly traded companies rely on shareholder money to finance their operations, and some of them reward shareholder loyalty with dividends or stock buybacks.
The financial reward is enough for some, but an increasing number of investors are looking to make a difference and make a dollar. This strategy — which we call social impact investing — empowers people to look at the societal good an investment creates along with the returns it generates.
However, building a socially responsible investment portfolio looks different for everyone. It’s not a one-size-fits-all process, and it requires investors to look at multiple methods to determine their ideal strategy.
A More Discerning Approach
In general, values-focused investors seek to align their investment portfolios with their personal values. But just as individuals’ values often differ, their desired outcomes for social impact investing also vary. Depending on what those goals are, they might adopt one of the following three strategies.
Note: Although people often use these terms interchangeably, they aren’t all the same.
- ESG investing: ESG investors use environmental, social, and governance criteria, along with financial metrics, as guiding principles when evaluating companies. ESG investing doesn’t necessarily label specific industries or business models as “bad” or “good,” though it does seek to avoid bad actors and align with good corporate citizens that have long-term upward trajectories.
- Socially responsible investing (SRI): SRI is an approach used by investors who choose to support companies that pursue beneficial social or environmental outcomes. They differ from ESG investors in that they will expressly avoid investing in companies that don’t reflect their values — regardless of profit potential.
- Impact investing: While advocates of ESG investing and SRI generally look toward publicly traded companies, impact investors seek equity in private firms. Investors who primarily focus on impact will often make direct investments in private firms whose products, services, or business models are directly geared toward doing good in order to maximize their environmental or societal impact.
How to Build a Socially Responsible Investment Portfolio
If you’re considering social impact investing, a financial advisor can help you identify the approach that best meets your goals. Even if you don’t have an advisor, here are some steps you can take to find the right strategy for you:
1. Know what you own. When embarking on a socially responsible investing strategy, start by taking stock of what you own. Account for all of your holdings, and figure out whether any of those investments run counter to your personal values.
For example, if you are in possession of an ETF or mutual fund, a data service like Morningstar can provide professional advisors or individual investors with back-end data analysis to help identify any problematic holdings. These findings can provide a blueprint for how you want to build your conscious portfolio going forward.
2. Align potential investments with personal values. Conscious consumerism isn’t just exclusive to purchasing products. Do the research necessary to find investments that connect with the issues you care about.
Any potential fund you are sourcing should have an investment mandate. Index funds, ETFs, and university endowment portfolios should all have them; find the investment mandate attached to any potential socially responsible investment you make to ensure your investment has your desired impact.
3. Use tech to audit your portfolio. Because many individual investors hold shares of ETFs, mutual funds, and other commingled products, not everyone knows exactly what they own. While you can use solutions like Morningstar proactively, technology can help identify troublesome investments that escaped you at first glance.
Online services like As You Sow can help you determine where your funds are allocated; you could also work with a financial advisor who specializes in social impact investing to gain additional insight into this area. Regardless of which path you take, do some research to determine whether the companies in your portfolio align with your values.
Social impact investing can take on many different forms. To prioritize both your financial health and your values, pick an investment strategy that brings both to the forefront.
Want some help evaluating your portfolio for social impact? Visit Pekin Hardy Strauss Wealth Management for a complimentary portfolio screening. We can assess your current holdings against a range of social and environmental issues to identify companies that may not align with your values.
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. 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. Because the application of Socially Responsible Investing (SRI) eliminates certain securities as investments, it may cause performance to behave either positively or negatively compared to strategies that do not screen for SRI criteria. Because impact investing may eliminate certain securities as investments, it may cause performance to behave either positively or negatively compared to strategies containing investments that are not excluded due to various criteria.
