Last week we had the opportunity to sit down with Dan Carreno of Change Finance and discuss responsible investing. Responsible investing can take on many forms from religious to social to environmental, etc. – essentially aligning your values with companies that conduct business responsibly.
If you want to invest in a company that limits the emission fossil fuels, there’s a fund for that. If you want to invest in a company that limits the use of palm oil, there’s a fund for that. Whatever you care about, odds are, there’s a responsible investment for you.
What is a Responsible Investment?
There are three main types of responsible investments that we discussed with Dan: socially responsible investments (SRI), environmental, social, and governance (ESG), and Impact.
SRIs are actually a bit old school. Investors are actually moving away from the original definition of SRI funds due to the negative screening process.
Rather than excluding these “sin stocks” from their portfolios due to negative social impacts (i.e. tobacco, guns, etc.), investors are beginning to focus on the positive externalities of companies. By focusing solely on the negative impacts of these companies, investors were generally sacrificing returns as returns were not the priority.
In the 90’s, investors moved toward ESGs. They began asking themselves, “what values mean the most to me? AND let’s go find strong companies with those values.” Rather than blocking out companies due to moral considerations, investors vetted investments on a more positive basis.
Which companies have a better environmental and social practice? Which companies practice better internal governance?
In fact, we at Denver Wealth Management offer a socially responsible investment portfolio with ESG and SRI screens.
And finally, we have impact investments. These investments are more straight forward as they generally impact a certain cause. Impact investments are more geared toward community-oriented campaigns (e.g. large-scale solar projects).
What’s the Screening Process for Responsible Investments?
Companies all carry certain risks which will affect their placement into certain funds. For example, some companies may face loss of social license, which is a fancy way of saying ‘loss of reputation.’ They may face stranded asset risk, which is specific to fossil fuels.
One of the larger risks assessed throughout the screening process is litigation risk. Litigation risk is the possibility for legal action against a company for any number of reasons.
At Change Finance, the process for screening litigation risk alone consists of 50 different factors. For instance, they check for environmental issues on a “granular level;” they check specific amounts of particulate matter, sulfide dioxide, and so on. They also check the company supply chain for human labor issues – how does a certain company treat its employees?
The process is never perfect in eliminating every possibility of litigation risk from your portfolio; however, you are able to drop the probability.
Let’s Discuss the Returns
Elephant in the room: do responsible investments forfeit my portfolio returns? Should I just invest in an index and donate money to the causes I value?
Not necessarily. In the podcast with Dan, he did an excellent job explaining a meta-analysis (a study of studies) that analyzes 2,200 of these responsible investment returns vs. regular indexes. The outcome: there is no conclusive evidence that the FTSE KLD 400 Index performed any worse than the S&P 500 Index. In other words, there is no substantial data that concludes lower returns from responsible funds.
Listen to the podcast here. At 13:54, we discuss returns.
Perhaps its uncharted territory for you as an investor, which can be intimidating. His advice and ours: speak to a financial professional about your options. We can help you find an investment that fits your portfolio and your values.
As I just stated, this is a discussion you should have with your financial professional. Responsible investing is a very complex space and it may take a lot of exploring to find the fund that matches your values.
If you want to take a look, Dan mentioned some great sites that can help you understand the impact of particular fund. Fossil Free Funds allows you to search any symbol for the environmental impact. They have sister websites as well that allow you to search things such as gender equality, palm oil impacts, etc.
Again, we do offer an SRI and ESG portfolio here and would be happy to discuss if this is something your interested in.
Check out the Mind of a Millionaire podcast for more from Dan Carreno.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Dan Carreno and Change Finance are not affiliated with LPL Financial and Denver Wealth Management.
The FTSE KLD 400 Social Index is a float-adjusted, market capitalization-weighted, common stock index of U.S. equities and is the first benchmark index constructed using environmental, social, and governance (ESG) factors. It is a widely recognized benchmark for measuring the impact of social and environmental screening on investment portfolios and is calculated by the FTSE Group.
The return may be lower than if the advisor made decisions based solely on investment considerations.
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