More and more investors want their portfolios to reflect their values. Some want to avoid particular industries. Others want to support companies with strong environmental records, fair labor practices, or good corporate governance. This approach goes by several names, including sustainable, socially responsible, impact, and ESG (environmental, social, and governance) investing.
Wall Street has responded with a wide range of mutual funds and ETFs built around these goals, available across most major asset classes. That makes it easier than ever to invest with your values in mind, but it also means you need to look closely at what you’re buying.
What about returns?
A long-standing concern is that investing with a conscience means giving up returns. The evidence is mixed. Some studies have found that sustainable funds performed in line with, or even better than, traditional funds over certain periods; in other periods they have lagged, particularly when sectors they tend to avoid, such as energy, led the market. Results depend heavily on how each fund defines its criteria and what it owns.
Because these strategies exclude some companies for non-financial reasons, the universe of investments is smaller, and you may miss some opportunities. That’s a trade-off worth understanding before you invest.
Tips for values-based investing
- Define your objectives. “Socially responsible” is a broad label. Some funds focus on environmental issues, some on social or governance factors, and some screen out specific industries. Decide what matters most to you first, then look for funds that match.
- Look under the hood. Two funds with similar names can hold very different companies. Read the fund’s stated criteria and review its top holdings to make sure they match what you expect.
- Compare costs. Expenses vary widely, and higher fees reduce your returns over time regardless of how a fund invests.
- Strike a balance. Decide how much you are willing to compromise between performance and your values, and set limits in both directions.
- Diversify. Values-based portfolios should still be diversified across asset classes and matched to your time horizon and tolerance for risk.
- Work with a professional. Building a portfolio that reflects your values and still supports your financial goals can be complicated. An advisor can help you evaluate the options.
Mutual funds and ETFs are subject to market risk, and shares may be worth more or less than their original cost when sold. For a broader look at building a diversified portfolio, see Growth vs. Value: Two Approaches to Stock Investing.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
