Values-based investors are those that align their financial decisions with their personal ethical principles. Also called “socially conscious investing,” it is a remarkably vibrant trend that continues to grow. In 2020 the total U.S.-domiciled assets under management using sustainable investing strategies grew 42% in 2 years with assets increasing from $12 trillion in 2018 to $17.1 trillion in 2020. This means that nearly 1 out of every 3 dollars under professional management are in values-based funds. This includes retail and high-net worth individuals who have increased their values-based investments by 50% since 2018. Financial industry research further indicates that 85% of the general population and 95% of the millennial population are interested in sustainable investing.
There are 3 general categories of values-based investing:
Socially responsible investing (SRI) can trace its roots to John Wesley, the founder of the Methodist movement, who instructed his flock to not invest companies that engaged in “sin” such as alcohol, weapons, tobacco and gambling. This approach involves actively screening potential investments to exclude financial activities that conflict with the investor’s values such as firearms and fossil fuel. This is an inexpensive method since the screening can be performed easily.
Environmental, social and corporate governance (ESG) investing actively seeks out companies that prioritize positive ESG goals and work to limit their negative ESG impact. These companies have decided that the long-term implications of their business decisions as they relate to the society and the environment are as (or more) important than the need to generate short-term profits. A number of large investment funds are now requiring companies in their portfolio to address ESG considerations because of the potential impact of such issues on the company’s long-term outlook.
Impact investing is usually limited to private funds that can provide more transparency on the impact of the investments on a specific cause and more flexibility in provision of those monies. These funds have a direct connection to the investor’s values-based priorities and the utilization of the provided capital. They typically can quantify the positive impact of the investment with such data as the number of meals provided, measures of economic activity in depressed regions, and carbon output reduction.