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 fund that excluded tobacco, weapons, or sometimes, oil stocks. That’s a crude generalization 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 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.

1. Do your homework
   There are more and more ESG-focused mutual funds and ETFs 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.  
2. 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 endeavoring 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.
3. 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.

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.