I’m often asked how to invest in socially and environmentally responsible companies. If I am an expert in anything as an investment adviser it should be this because it’s been my investing focus for the last seven years. But I’m not because if I’ve learned anything the answer is very personal to each person. One person’s socially conscious company might be another’s pariah to society. The people who specialize in ESG (Environmental and Social Governance) and/SRI (Socially Responsible Investing) use analytics to determine who fits the bill and most companies are doing what is necessary to meet accepted standards of pollution and enough community outreach to look good on a PowerPoint presentation. Of course there are industries who in there nature fall out of the parameters like gambling and tobacco
The primary concern even for the most conscious investor is how profitable will the investment be….obviously….or you might was well give the money to a non-profit. Most of the ESG/SRI funds and index’s have done just fine. They have been close to the major indexes, even beating them in some cases, partly because these funds and indexes contain many of the big brand names that have lead the stocks markets recent 10 year run.
Research from the ivory tower has concluded that companies who are more socially and environmentally responsible do not sacrifice performance and some conclude they might perform better over time. The reason makes sense to me. Better quality products, happy employees and stakeholders, great customer service, making sure to preserve the environments they will depend on for resources(although this last one is not really a clear and immediate issue…..yet). The contrast would be focusing on profit at any costs and as soon as possible even if it means poor quality and little concern for people and resources…..reasonably not a sustainable way to do business.
If you like to know that your money is invested meaningfully, with hope of profit then any of the ESG/SRI funds you can find at the big name firms like Vanguard , Blackrock etc will serve your needs. If you are more particular about what companies are socially and environmentally responsible you will either need to hire someone to do the research using your criteria or you can do it yourself. Between the transparency made possible by the internet and your own personal experience you could probably build
yourself a sustainable and prosperous portfolio. Just remember a sustainable means that it’s financials allow it to be around for a long time.
I also think that there is a “within reason” variable that needs to be considered. Airplanes are terrible polluters but does air travel help progress as an example.
Also unfortunately for most of us the only available investments are in publicly traded companies who are under pressure to show a certain amount of earnings growth every 3 months, which makes it difficult for them to give long term vision a priority:
Here are the attributes I look for:
- Quality Products – The company’s product or service is socially responsible and environmentally considerate and is of the highest quality. When you think of a brand name does what comes to mind feel like it’s good for the world?
- Happy Employees – they paid and treated well. Scan the internet for feedback on employee satisfaction. Sites like Glassdoor do a good job of gathering employees feedback.
- Executive Pay – This is relative, you may think that all executives get paid more then they deserve but the reality of the situation in the US right now is that high executive pay necessary for being competitive. I try to discern whose making the best effort to take less and pay employees more.
- Company Intention – How do you really know whether a company wants to improve well-being or trying to do it to look good. I think that if you pay close enough attention to news about the company and the executives you’ll know. I also like to look at the” form-10k”(easily found with an internet search), a very legal document public companies are require to file with the SEC. No reason for anyone to read it so I feel like it says a lot if the company makes an effort to write their intention to improve the world. Look under “Item 1. Business” , which is usually a short paragraph.
- Board Diversity – the more women on the board the better. But at least 20% of the board should be women. And….it tends to help your returns.
- Financials – Just because a company has an good mission does not mean it’s going to last. They need to make money. Many growth companies are still loosing money but yet their stock price keeps going up. Their sustainability remains to be seen. Find companies that have positive earnings and debt that will be serviceable if there is a recession. After-all your portfolio needs to last.
- Profile the founder/CEO – a lot can be learned about a company by knowing about its leader.
- “Invest in what you know” – the most famous principle of a well known and successfully investor Peter Lynch. This principle goes even further when investing in responsible companies. The companies whose products and services that you are loyal to are your best opportunities to know whether they are a worthy investment and if they stand up to your values.
- Real Estate – we all know real estate well, unless you live in a tent. Whether you rent or own you know the ins and outs of residential real estate. It’s the one thing we know will continue to be the biggest expense for most people and you may consider it the most responsible investment around. Look for real publicly traded real estate funds or maybe buy a house to rent. But it’s as important to do your research.
The process of responsible investing be fun, prosperous and feel good, but it takes a lot of work. If you are looking to make change or an impact, investing pales in comparison to how you live – there is no shame in owning an index fund or an ESG fund even of there are a few companies you are at odds with . How you spend and behave will have a much greater impact on the environment and people around you, and you need to be able to afford doing it.