The Value in Values-Based Investing

Jan 09, 2014

As companies discover the financial benefits of socially responsible practices, aligning your portfolio with your personal beliefs has never been easier.

You may be familiar with this dilemma: You're personally concerned about the environment, or socially responsible business practices, but are unsure of the impact investing in companies that reflect these concerns might have on your financial picture. And for decades, if you wanted to invest in a way that reflected your personal beliefs, you didn't have many options. You accepted the likelihood of subpar returns for the comfort of knowing your finances were consistent with your values. Many fund managers and corporations felt the same way, deriding values-based investing (VBI) as a feel-good money loser for more principled souls.

But the world is changing in dramatic ways, and investors and companies are now realizing that doing good and doing well financially often go hand in hand: In the U.S. alone, according to a 2012 study by the Forum for Sustainable and Responsible Investment (US SIF), an investor group, values-based investing now accounts for $3.74 trillion, or roughly one in every eight to nine dollars under professional management. That's 22% higher than the $3.1 trillion in VBI investments listed in the organization's 2010 report. Globally, there is a combined $13.6 trillion of managed assets that incorporate environmental, social and governance (ESG) concerns into their investment selection and management, according to the 2012 report of the Global Sustainable Investment Alliance (GSIA).

Corporations now routinely tout their commitment to ESG issues as a sign of not just fiscal but social astuteness as well. A September 2012 report by Osmosis Investment Management, published online by Harvard Business Review, noted that a portfolio of global companies meeting high standards for resource efficiency outperformed the broad MSCI World Index in 2012. (For more on the sweeping changes across the globe that are helping fuel these trends, please see A Transforming World.)

Expanding Options for Investors

With these recent developments has come a broad expansion in the kinds of strategies now available to you. Increasingly, some managers of values-based funds are shifting from "negative screening," a relatively straightforward process of eliminating companies or industries deemed undesirable, to an approach that actively seeks companies that have strong, forward-thinking policies on environmental, social and governance issues. Moreover, the socially responsible mutual funds that have long dominated the approach have been joined by exchange-traded funds, private-equity funds, venture capital funds and closed-end funds that have social responsibility mandates. There are now faith-based funds that look for companies committed to responsible labor practices, and environmentally focused funds that make energy efficiency a high priority. All that means that values-based investing is now an approach available for a variety of income levels and investor types, and it can help you pursue a broad range of goals.

However, with today's expanding opportunities comes the need for heightened scrutiny of possible investments, says Anna Snider, Global Head of Equity Manager Due Diligence at Merrill Lynch. "We're looking for investment managers who take a deep dive, company by company, and who analyze these companies based on their ESG-based policies and practices to unlock additional value relative to others in their sector," Snider says, adding that although the public equity options in this space are increasing, only a select number of managers fit this profile.

Shareholder Activism

Values-based investing doesn't begin and end with gaining exposure to companies whose policies align with your beliefs. Today, individual investors can help change companies by becoming more active via shareholder meetings and proxy voting. For example, shareholder resolutions may call for a company to clean up emissions, or to rein in executive pay, or ensure that its overseas partners pay workers fair wages. While one small shareholder's vote still isn't likely to tip the scales on a specific resolution, voting on many resolutions rather than on just a couple can amplify an investor's voice substantially, observes Kimberley C. Paris, a director of the Merrill Lynch Managed Solutions Group. "There's a real ripple effect in more people casting more votes," she says. "Shareholders are figuring out ways to come together and have influence."

A similar ripple effect has helped propel values-based investing into the mainstream. Values-minded investors have always been driven by the motivation to do good and to make a difference. But it's the ability to achieve a healthy balance between helping the world and meeting financial goals that has motivated more and more investors—and a growing number of corporations—to come on board. As a result, values-based investing is looking less like a trend and more, perhaps, like the face of a future in which everyone may stand to profit.

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