Local Wealth Management Advisors Explain Socially Responsible Investing
By Scott Pruden
Ethical investing, also known as socially responsible investing, provides returns beyond the dollars and cents.
When a prospective client visited investment counselor Nandita Das to discover alternative ways to invest the money they would otherwise be funneling to their company’s 401k plan, Das was a little baffled.
Why, the founder and owner of Das Financial Health in Newark wondered, would this investor give up the opportunity to make a tax-free 401k contribution that would be matched up to a certain percentage by their employer? The answer, she soon learned, was that the individual was interested in following what’s known in Islam as Sharia-compliant finance—allocating investments that followed the principles taught in the Qur’an. These include avoiding any form of usury (lending money at unreasonably high interest rates), and interest-bearing situations in general. It also forbids investments in, among other things, pork products, alcohol and “immoral goods.”
“He didn’t want to invest in his company’s 401k because, he said, ‘They would invest in things I’m not comfortable with,’” says Das, who is also a professor of finance at Delaware State University and a researcher in socially responsible investing (SRI).
It’s an issue that goes back as far as the earliest days of investing. Does a person who seeks a return on an investment focus more on the return itself, or consider first how that return is achieved? Islam isn’t unique to encouraging its adherents to examine these factors. The first five books of the Bible codify the ancient Hebrews’ belief that because investing in an enterprise makes one a part owner in that enterprise, the investor must use that role as a property owner to prevent harm to others. Today, this is applied more broadly to large corporations whose products or processes might have adverse effects on others.
“It’s become very important for our younger investors to make sure their portfolios are invested in these kinds of strategies.” —Hayes Roberts, Tiedemann Trust Co.
Members of the Religious Society of Friends, commonly known as Quakers, were adamant in opposing slavery and promoting pacifism beginning with the denomination’s formation in England the 1600s. These beliefs have guided the investment strategies of many Quakers since. In the New World, John Wesley, the founder of Methodism, discouraged investments in businesses that would harm workers and one’s neighbor.
Today, SRI has exploded, both in interest and the options investors have to let their money do good while providing a return. While many socially responsible investors continue to be guided by the principles of their faith, others are led by an understanding that companies that do good and treat people well can offer equal or better returns without concerns about how those returns are being achieved.
Many investors moving into the world of SRI or, as it’s alternatively known, environmental, social and governance (ESG) investing, first arrive with a list of sectors they don’t want to invest in, Das says. Those might include companies involved in fossil fuels, alcohol, tobacco or weapons. This is known as negative screening.
This initial conversation, Das concedes, can feel more like emotional counseling than investment counseling. “When they come and say, ‘I don’t want to invest in these and these,’ it’s opening the door for a bigger conversation,” she says. “What is behind that? Why are you telling me this? Can we talk about it?”
Sometimes, those interests conflict with foundational investment advice like taking advantage of employer-based investment plans that offer both tax benefits and an employer match. “Why are you doing these things? Because for you, your value system is very important, so you don’t care about tax implications or the free money because it does not fit with your value system,” Das says.
From this point, the conversation will turn to what’s known as proactive tilting, or asking an investor what their goals are and what positive results they would like to achieve with their investments, says Brad Harrison, managing director and co-head of investing for direct impact for Tiedemann Trust Co. For instance, getting out of fossil fuel investments is often an investor goal, but to really make an impact a portfolio needs to be balanced proactively with investments in climate solutions, he says.
Fortunately for investors, we’re currently in something of a golden age for SRI and ESG options, Harrison says. “The space has grown exponentially over the last couple of years,” he says, noting that today one in four professionally managed dollars—more than $12 trillion—are invested in ESG or impact fund, a figure backed up by the US SIF Forum for Sustainable and Responsible Investment in Washington, D.C.
Part of that growth is being driven by young investors, says Hayes Roberts, managing director of Tiedemann Trust Co. “We manage assets for multiple generations and multi-generational families, and it’s become very important for our younger investors and clients to make sure their portfolios are invested in these kinds of strategies,” he says.
As far as returns go, the numbers for SRI and ESG funds are comparable to—if not better than—those of traditional indexes like the S&P 500, Das says. And, she notes, even if the monetary returns might sometimes fall short, there is the karmic benefit of knowing that your investments are doing some good.
“When we’re talking about socially responsible investing, we’re focusing on what we’re leaving behind,” she says. “Investors are showing that they care not just about leaving money to the next generation, but that making sure they’re leaving a safe environment or a society that’s just is equally important.”