As the importance of good governance and environmental stewardship continue to be at the forefront of politics and media, the need to “do good” with money is becoming an ever more popular trend with investors. In recent years, different forms of socially responsible investing (including ESG and impact investing) has emerged into the investment industry.
Socially responsible investing (SRI) is a way for your clients to seek profit while tailoring their portfolio to causes they care about. These investment options stay away from so-called vice industries such as alcohol, tobacco, gambling and weapons. Socially responsible investments also avoid putting money towards companies who have human rights violations, cause damage to the environment (such as mining corporations) and use animal testing on products or services.
Instead they focus on industries and companies who have a positive impact on the world, population and environment. This can include work in social justice, environmental sustainability and alternative energy or clean technology.
Financial advisors can help clients find the best socially responsible investment strategy by exploring all options that match an investor's preferred social good. However, since SRI is relatively new to the investment industry, advisors can almost guarantee their will be questions about the benefits of choosing these funds over more traditional investment options. (For more, see: Advisors: Incorporating Impact Investing in Client Portfolios.)
Here’s how to talk to clients about the advantages of diversifying their portfolios with socially responsible investments.
What are the benefits of socially responsible investing?
A major benefit of investing in socially responsible companies is the positive impact on an investor’s conscience; they can now rest assure that their personal beliefs don’t need to be sacrificed to gain a profit. If an investor is against animal testing and gambling, they now have the option to support those beliefs fiscally and take their investments elsewhere.
Historically, vice industries have returned profits for investors and shareholders. However, withdrawing and withholding money from stock purchases is a new form of sanction that can have a large fiscal impact on a company’s bottom line. If a client is unsure if SRI is appropriate for them, advisors can first have a conversation about companies with positive and/or negative social impacts, to gauge how strongly a client feels about those effects. If a client insists that those beliefs need to be incorporated into any portfolio management, then the advisor can present several options based on the client's preferences.
What are the options with socially responsible investments?
The second thing your clients should know about socially responsible investments is that the number of options available to investors is increasing. As this new trend of “doing good” with money continues to grow in popularity, asset managers are expanding their product offerings to accommodate socially conscious investors. According to the US SIF, SRI investing grew 33% over the past two years, with the total US-domiciled assets under management totalling over $8.7 trillion at the start of 2016.
As financial advisors continuously try to meet the needs of their clients by offering socially responsible investing options, fund managers and asset management companies are adding to their offerings to support the demand for responsible investment strategies. The US SIF report found that the factors having the greatest impact on new fund options include: climate change, clean technology, labor and human rights, diversity and equal pay, and avoidance of repressive regimes.
US SIF even has a guide to more sustainable investing, that advisors may find useful as they explain these investment options to clients.
Are their costs associated with socially responsible investments?
Yes, as is the case with the majority of investment options, you get what you pay for. Socially responsible investing comes with costs your clients will already be familiar with - transaction fees and expense ratios.
Portfolio management expertise has a price, but this is not unique to SRI. In the investment industry, actively-managed funds (which many SRI funds are) have a higher expense ratio than passively-managed funds such as an index fund because are relying on a professional to hand-pick investments.
If cost is a concern for your clients, finding a balance between actively-managed and passively-managed funds can help lower the overall cost of a portfolio while providing access to portfolio manager with expertise in socially responsible investment options. (For related reading, see: 5 Reasons Advisors Need to Rethink Impact Investing.)