Investing your values: What matters most
Building an investment portfolio that aligns with your sustainability priorities and values shouldn’t be a pipe dream.
Investing your values: What matters most
Sustainable investing is gaining traction. Sometimes referred to as values-based investing, this is not to be confused with “value” as an investment style, famously championed by Warren Buffett and loosely defined as picking stocks with upside potential but trading below their intrinsic (or book) value. Rather, sustainable investing in our context is aligning sustainability goals with financial objectives by balancing environmental, social, and governance insights with financial metrics.
Years ago, this was generally referred to socially responsible investing (SRI), and the gist of it was simply buying a mutual fund1 that excluded tobacco, weapons, or sometimes, oil stocks. That’s a crude generalisation of course, but it’s how this early iteration of sustainable investing was often implemented.
Things have changed, and more investors—from individuals to institutions—are getting in on it. Today, SRI has evolved and (mostly) replaced by three new letters: ESG. ESG investing refers to an approach that uses environmental, social, and governance considerations alongside financial information in the broader investment process.
Environmental criteria reflect issues like climate change, biodiversity and whether a company is a good steward of the environment. Social criteria look at diversity and inclusion and how a company treats all its stakeholders and the community at large. And governance focuses on items like a company’s executive compensation, board oversight, and whether a company maintains shareholder-friendly policies.
In general, ESG factors can be used to avoid companies with lagging policies and practices, or increasingly as a tool to identify companies well positioned to take advantage of new opportunities. This sort of investing has been embraced by many pension funds and other institutional investors who have included sustainable mandates as part of their investment policy statements. And now more than ever, sustainable investing is resonating with individuals. After all, just as they do with spending, investors have choices in how they allocate their own capital, and aligning personal interests with investment portfolios seems like a natural extension of living one’s ideals.
While it’s impossible to give a comprehensive primer on sustainable investing in a short blog, here are a few considerations if you’re interested in further exploring such an approach.
- Do your homework
There are more and more ESG-focused mutual funds and exchange-traded fund (ETFs)2 available every year, which can help investors to allocate capital to align with their values efficiently. As ever, caveats apply. Glossy marketing can make it challenge to understand what approach to sustainability a fund takes. Investors should do their due diligence on these funds—look for details in the prospectus and reporting that supports the manager’s stated philosophy and methodology.
- Walk before you run
Sustainable investing can be used as a framework for building and managing an entire investment portfolio. But investors may wish to ease into it and add a small slice—a few ESG-focused investments or a fund or two—before endeavouring to restructure an entire portfolio around a specific focus. And when reallocating, it’s important to note how adding in an ESG fund can inadvertently tilt your portfolio. For example, if an ESG fund eschews certain energy, industrial or cyclical stocks, does that mean it skews more toward a growth fund and away from value in terms of investment styles? Be aware of how these decisions might impact your entire portfolio’s diversification features.
- Don’t go it alone
By now, most advisors and financial intermediaries understand that sustainable investing is not a fad, and many are well equipped to help clients navigate the landscape and provide advice in this area. Don’t hesitate to implement your own approach to sustainable investing, but don’t hesitate to ask for help either.
1 Mutual funds: A mutual fund is a financial vehicle that pools assets from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
2 ETF: An exchange-traded fund (ETF) is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other asset, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can.
Information presented is intended to be educational and should not be construed as investment advice. Carefully consider the investment objectives, risk factors and charges and expenses before investing.
Sustainability guidelines may cause a manager to make or avoid certain investment decisions when it may be disadvantageous to do so. This means that these investments may underperform other similar investments that do not consider sustainability guidelines when making investment decisions. There can be no assurance goals will be met.
If a product or strategy is subject to certain sustainable investment criteria it may avoid purchasing certain securities when it is otherwise economically advantageous to purchase those securities, or may sell certain securities when it is otherwise economically advantageous to hold those securities.
Sustainability is not uniformly defined and scores and ratings may vary across providers.