What's In Your Investment Portfolio?
by Barry Wind and Jeremy A. PearceSocially Responsible Investing (SRI) is a three-pronged strategy designed to align your social and personal values with your investment portfolio. The three prongs of SRI are investment screening, shareholder advocacy and community investments. Investment screening is the most well-known SRI strategy and is what we will discuss here in greater detail.
Almost all consumers screen out or in stores, products and services when making purchases in their everyday lives. Some may only frequent shops and stores that are locally owned. Other folks may stop buying a particular brand because of workers' rights or anti-consumer concerns. Investment screening works in much the same way. Socially responsible investors seek to identify investment opportunities that have a positive impact in their communities and in the world, while avoiding investments in companies that are contrary to their personal and social values.
The history of investment screening is actually quite long. Ancient Jewish law contained rules related to investing ethically. Beginning in colonial times and continuing to this day, Quakers and Methodists have practiced socially responsible investing, shunning investments in slavery and war-related businesses.
More recently, socially responsible investing has its roots in the cultural and social changes of the 1960s. Religious, labor and anti-nuclear groups began to spurn investments in companies that were antithetical to their values and interests. In the 1980s, the divestment campaign against apartheid South Africa was a key factor in dismantling the autocratic regime. Currently, growing awareness of climate change has generated momentum among individual, governmental and nonprofit investors to have portfolios that are fossil-fuel-free.
In addition to supporting companies that are in agreement with your social and personal values, identifying and investing according to environmental, social and governance issues may have a positive impact on corporate profitability and share price. This deeper corporate analysis may highlight practices and policies that are leading indicators of how well or poorly a company is managed in the long term.
Filtering out companies and industries from your portfolio, sometimes referred to as negative screening, helps to ensure you are not owning corporations that are in conflict with your beliefs and values. Industries and practices that are often screened out of portfolios include oil and gas, mining, military, weapons and animal testing. That said, any socially responsible investing will primarily be defined by your own unique belief system, hopefully with knowledgeable guidance from your financial advisor or investment manager.
Targeting industries to be specifically included in your investments is often called positive or impact screening. Solar and wind energy, energy conservation, organic and natural foods, affordable housing and public infrastructure are some of the financial sectors of the economy in which SRI investors are likely to invest.
So with all this screening out some corporations and industries that aren't a fit with your beliefs and including companies that do, how does one build a diversified, balanced portfolio of long term investing? Generally speaking, excluding some large corporations for SRI concerns will leave many other blue chip stocks in which to invest. These larger, less volatile firms will form the core of your portfolio.
Those companies that you find to be especially appealing because of their progressive products and services or corporate practices can also be included in your portfolio. These typically smaller, more volatile companies will generally have more risk, more reward and may comprise only a small portion of a less aggressive investor's investments.
Investment screening can be achieved either through the purchase of individual stocks and bonds or through investing in screened mutual and exchange traded funds. To get started, investors with a history of investing experience may opt to begin socially responsible investing on their own. Those with less investing experience may want to work with a knowledgeable SRI advisor. Either way, investment screening can play a principal role for any investor who is seeking to align their ideals with their investments.
Barry Wind and Jeremy A. Pearce are financial advisors in the Washington, D.C, area, specializing in socially responsible investing with SharePower Responsible Investing, Inc. Comments and questions can be sent to [email protected] and [email protected]
Investing involves risk including loss of principal. Different types of investments carry varying degrees of risk and clients and prospective clients should be prepared to bear investment and original principal loss. Investing, including socially responsible investing, does not guarantee any amount of success.
Securities offered through Cambridge Investment Research, Inc. member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and SharePower Responsible Investing, Inc. are not affiliated.