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Social Values Investing: A Propel Primer

Environmental, Social and Governance (ESG) considerations are gaining popularity amongst investors.Considering these factors when making investment choices is a great tool that can lead to lower risk and enhanced returns.  ESG criteria provide a way to determine a company’s ethics, sustainability, and future earnings.  Examples of ESG factors include:

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  • Pollution
  • Diversity
  • Board independence
  • Carbon footprint
  • Labor Standards
  • Corruption
  • Waste Management
  • Product Safety
  • Ethics

Another approach to responsible investing is called socially responsible investing (SRI).  This approach seeks to align an individual’s social values with investment performance.  Investors screen out companies that do not meet their criteria, for example, companies that sell alcohol, tobacco or firearms.

One of the main myths people hold of responsible investing is that these investments perform poorly.In fact, the opposite is generally true.What ESG does provide is a framework for an enhanced analysis of companies.  The approach allows an investor to get a better understanding of their risks and opportunities, both the financials and intangible non-financials such as a company’s human capital, their brand, and environmental stewardship.

Evaluating the data demonstrates the potential value of socially-conscious investing.Recently, Charles Schwab compared performance of SRI and non-SRI fund performance over the past ten years:

Source: Charles Schwab Investment Advisory, Inc., with data from Morningstar, as of December 31, 2018. Returns represent the average annualized performance of U.S. equity open-end socially conscious and non-socially conscious mutual funds. Past performance is no guarantee of future returns. The number of socially conscious funds with three-year returns is approximately 316, compared with over 6,500 non-socially conscious funds. Morningstar defines funds as socially conscious if they invest according to noneconomic guidelines such as environmental responsibility, human rights, or religious views.

With the increased popularity of ESG in the investing community, more investment choices are becoming available to meet demand. In addition, more companies are addressing these factors in their regular disclosures with the SEC. Research services such as Morningstar now evaluate mutual funds and equities by their ESG factors. With this information becoming more widely available, it’s becoming easier for investors to evaluate their investment choices at different levels beyond just financial levels, thereby having greater choice in how to invest their money soundly and in line with their values.

If you’re interested in aligning your portfolio, or part of your portfolio, with your social values, please ask us how we can help.

-Amanda Vaught