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  • Erin McCloskey, CFP®, EA

Basics of Ethical Investing (Or, Put your money where your values are)

Are you concerned about the impact to the environment or society on the part of the companies you hold in your portfolio? Many funds today are tailored to investors who want their values to be reflected in their investment choices. Getting into the details of the offerings can become murky fast. Let’s take a look at two categories of values-based investments, ESG and SRI.


(By the way, for me, writing this post left me with many more questions. I hope you will feel the same way after this basic introduction.)


In ESG funds or Environmental, Social and Governance funds, risks and opportunities are considered to be driven by economic value. They are for investors who primarily are looking for a good return on their investment, but want to support companies who are trying to be better stewards (the flip side being taking away investor dollars from companies who do the most harm).


Some Environmental factors could be:

-Transparency regarding plans and policies for greenhouse gas emissions, carbon footprint, reducing waste, recycling

-Using renewable energy sources


Social factors include:

-Relating to employees (training, diversity, inclusion, benefits)

-Relating to suppliers (conflict-free, environmentally responsible)

-Consumer protections, public stance on social issues


Governance factors include:

-Relating to the board of directors eg conflicts of interest, diversity

-Exec pay based on long term goals vs short term shareholder satisfaction, other benefits and perks


Different things matter in different industries. The Sustainability Accounting Standards Board (SASB) has created a Materiality Map, which helps companies identify “the issues that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors”. The idea is that an array of factors are important to gauging sustainability at the sector and industry level, categorized across five dimensions (see graphic).



SRI funds, or Socially Responsible Investing funds, seek to incorporate social or ethical aspects to investing. These values are more important than the economic gain to SRI investors. They want to use their investment for social impact first, and realize potential economic advantage second. Some SRI funds may screen out companies that produce weapons, alcohol, tobacco, companies who do business with certain war-torn countries, even makers of drugs for abortion procedures.

I should also mention impact investing, which means moving funds to hand-picked companies whose mission statements are explicitly about being profitable while solving an issue in society, and doing so in a way that benefits many who are not shareholders.


It’s easy to lump ESG and SRI together, in the sense that the investor wants to have their money do (at the minimum) less harm.

For example, pollution can hurt a companies’ profits and a person’s health. Therefore, avoiding big polluters is a practice both for an ESG fund or an SRI fund. But, what about a profitable defense contractor that makes missiles, but has high scores for sustainability, diversity and employee benefits? The SRI fund would cut them on principle but the ESG fund may love to include them. Some consider ESG a subset of SRI funds. I have seen it also described as “value - ESG- vs values - SRI” or opt-in (ESG) vs opt-out (SRI’s screens of certain behaviors or types of companies).


Investors are taking part in the “do well by doing good” idea that is motivating more corporate leaders. So, what strategy is best for you? Are you seeking the value (returns) primarily, or are you motivated to have the investment strictly reflect your values first, or maybe some of both?


Obviously, cost is an important factor no matter what. Always review the funds for which companies they hold, the fund manager’s philosophy driving her makeup of the portfolio, and the costs. There are annual operating expenses, ‘loaded’ funds that can have a higher expense up front (but usually a lower annual expense because of this), or surrender fees if you sell your shares in a certain time frame, such as the first 90 days.


At my broker-dealer, Cetera Financial Specialists, we have hundreds of funds that pass an initial social-screen aspect, and dozens that are specifically made for SRI or ESG investors, both mutual funds and ETFs alike. Many have a minimum investment like $1000-$5000. If you would like to talk more about how these funds can fit into your strategy, contact me and we will get started.



Disclosures:

All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.

Investing in mutual funds is subject to risk and loss of principal. There is no assurance or certainty that any investment strategy will be successful in meeting its objectives.


Investors should consider the investment objectives, risks and charges and expenses of the funds carefully before investing. The prospectus contains this and other information about the funds. Contact their Registered Representative to obtain a prospectus which should be read carefully before investing or sending money.


Securities offered through Cetera Financial Specialists LLC (doing insurance business in CA as CFGFS Insurance Agency), member FINRA/SIPC. Advisory services offered through Cetera Investment Advisers LLC. Cetera entities are under separate ownership from any other named entity. Cetera Financial Specialists LLC reserves the right to monitor all Cetera Financial Specialists LLC related.

Erin McCloskey, CFP, EA holds financial registrations in the following states: CA, NV.  CA Insurance license #0M04184. NV Insurance license #3348240.

This is not a solicitation for sale of securities in any jurisdiction.


Securities offered through Registered Representatives of Cetera Financial Specialists LLC (doing insurance business in CA as CFGFS Insurance Agency LLC), member FINRA/SIPC.

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