We attended RIA Canada‘s annual conference on June 1-2, 2017 on responsible and impact investing. Sometimes used interchangeably, responsible investing and impact investing have some differences. Whereas impact investing tends to focus on investment opportunities and activities in private investment or prospectus-exempt opportunities, responsible investment tends to mean marketable securities. We compiled some further information on responsible investment in conjunction with last week’s conference.
What is socially responsible investing?
The UN Principles for Responsible Investment define Responsible Investment as:
… an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns.
Socially responsible investing (“SRI”), also now referred to as sustainable, responsible, and impact investing, is typically identified by the following characteristics:
- Investments in marketable securities such as stocks, bonds, mutual funds, and ETFs
- For the purposes of a blend of financial returns and environmental and/or social aims
In the past, SRI has typically meant negative screens, meaning the exclusion of investment products in certain categories of companies such as tobacco, oil and gas, firearms, pornography, animal testing, and gambling, but not limited to this list. Negative screens might be developed by portfolio managers, investment advisors, or investors themselves.
Some socially responsible investments and SRI portfolios include the “less bad” companies in their categories. As such investors have sometimes found companies within their SRI portfolio that don’t align with their idea of taking care of people and the planet, even though they are the best of their breed.
Some determined advisors and investors design their investment portfolios based on positive screens by identifying companies with environmental, social, and governance practices that do take care of people and the planet (or as I call it, “taking care of the village”) or have a certification such as B Corp. However, publicly traded B Corps are currently few and far between and make up only a small fraction of the total market for securities.
How have socially responsible investments performed versus others?
The following should not be construed as investment advice, but is instead for information purposes. Ensure that you get advice and make your own decisions about the appropriateness of investments to suit your needs and goals.
Choose your socially responsible investment and benchmark wisely. Compared to a similarly constructed index, an indexed portfolio designed with a socially responsible lens outperforms a non-social benchmark.
“Going back to the 2008 crash, KLD dropped with the broader market. But it managed to outperform the S&P 500 when the economy was at its worst and has had a more impressive rebound — jumping 185% since its March 2009 bottom, compared to the S&P’s 171% bounce.” — The Perfect Stock For Socially Responsible Investors
How to get started in socially responsible investing as an investor
When Pique Fund was the seed of an idea in 2012, I spoke with a lot of people who wanted to get started in impact investing. Some people wanted to jump right in and find opportunities in which they could put their money straight away. Others wanted more information and education before moving their money. Others still wanted a mix of the two.
Investor communities started to form – like the community around Pique, networks, and investment clubs – where people could discuss responsible investing, learn from each other, and hear about opportunities to invest. Investing can (and maybe should) be a social thing. We can benefit from the diversity of perspectives.
1. Start with what you know. This is a general investing tip. Starting with what you know gives you a head start on evaluating investment opportunities and due diligence.
2. Prepare yourself. Do your homework and some research. Read books and responsible investment blogs such as Sustainable Economist, ImpactAlpha, and Green Money Journal.
3. Meet other investors. As I mentioned above, don’t go it alone. Meet with other like-minded investors or rally around a common theme and invite people that have different perspectives. Joining or forming a responsible investor meetup group is a great way to find peers with whom to exchange investment ideas and information.
4. Learn by doing. Start small and just do it. Set yourself a schedule to review your investment choices and portfolio periodically. Don’t check on it every day. Most advisors recommend adding funds to your portfolio on a regular schedule over time, rather than investing a lump sum and trying to time the market.
I also wrote a post about getting started in impact investing, which helps lay a foundation and framework for determining what to invest in and how. The steps detailed in that post are:
- Know your why – to guide in what and how you invest
- Find your tribe – as in, meet other investors, above
- Do your due diligence – the evaluation process
- Make decisions – choosing!
These steps could be just as applicable to responsible investing as they are to impact investing.
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For more impact investing resources and tools, check out Integrated Investing: Impact Investing with Head, Heart, Body, and Soul, available at all major online book retailers.
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