What does it all mean, and does it work?
In my inbox today was another announcement from a well-known mutual fund / ETFcompany who is launching their own version of ESG investing. I've become a bit jaded by all of this, as the investment management industry is now rushing to appear to be "responsible" for a demographic that appears to be worth billions of dollars in assets. For several years, we at Artifex have constructed custom portfolios for people with an interest in what I would term "values investing." We've invested in tools and subscribe to expensive research to enable us to do this effecively.I can tell you that many of the current offerings in this space are very lacking in different ways, and that a lot of the advertising around this style of managing money is little more than asset-gathering marketing. In my latest white paper (which you can get at the bottom of this post), I mention that I recently evaluated five of the top SRI/ESG ETF's (Exchange-Traded Funds) and discovered that from 18-25% of the holdings would not meet our basic screening criteria, which means that these funds would not be suitable for the majority of our ESG clients.
Given the confusion and "mad rush" to introduce appealing offerings to the public, maybe we should take a step back and look at this approach in order to better understand it. We'll do this in a step-by-step fashion:
- Understand the acronyms.
- SRI - Does not stand for "Socially Responsible Investing", but "Sustainable, Responsible and Impact" investing. It is a broad term that incorporates ESG criteria normally.
- ESG - Environmental, Social and Governance. This is what we mostly pay attention to, as it is the most applicable to our clients. "Environmental" criteria can be very specific to an investor, and can refer to carbon emissions, pollution grades, corporate practices on conservation, etc. "Social" criteria can include such things as how a company treats its employees, its record of community service, hiring and promotion practices, equality in the workplace, etc. "Governance" refers to how a company manages itself, from the board on down to in-house ethics, management, quality and customer service standards.
- Impact - True impact investing is where shareholders take action to make positive changes in their community (green bonds, for example) or at the corporate level. This is very difficult to do effectively, and is best left to the mutual funds and pension plans who engage in it on behalf of their constituencies.
- Values and Faith-Based - "Values" can refer simply to an investor's preferences. For example, some of my clients tell me that they don't want to invest in tobacco stocks, or alcohol distillers, or companies that produce weapons, but beyond a few restrictions, they are fine with everything else. "Faith-Based" investors may want to make sure their investments don't include companies that further abortion, or warfare, or certain food production. It's even possible today for devout Muslims to select portfolios that adhere to Halal investing principles.
- Determine your values. We have an easy-to-use questionnaire that can help define the restrictions or positive characteristics for your portfolio. You can't really be an SRI investor without defining what you want first.
- Condense your philosophy in a personal Investment Policy or summary for your family and future generations. This can be an enjoyable and valuable exercise so that you and your heirs understand what is important to you and perhaps give you a method to perpetuate your philosophy.
- Work with a qualified advisor to help you screen and implement your portfolio. Not all advisors have the tools or experience to effectively do this. It is a unique sub-specialty. Expect to pay a little more to get it done right. The added effort and research capabilities are worth the money.
- Periodically monitor your holdings (at least once a year) to make sure they are not failing your criteria in some way.
There's much more I could write about this area of investment management. It's something that I have always enjoyed, and I am fortunate to be able to provide this service to our clients. I am also convinced that if done correctly, this approach can add to the performance of your portfolio. Certain social and governance factors are indicators as to a company or fund's overall philosophy and can separate a quality long-term attitude from a short-run, "grab-all-you-can-at-all-costs" mentality.
Please contact me directly at 855-752-6644 if you'd like to discuss our approach to SRI investing and how it help you "express your values".
For my latest whitepaper on this subject, click here: