One of the more striking transformations in personal finance over the past two decades is the growing embrace of socially responsible investing broadly defined, also known as value-based, sustainable and impact investing. Whatever term you favor, the trend is worth applauding. Many people are trying to marry their charitable giving sensibility to their investment portfolio, an approach that promises to magnify deeply held values.
In the U.S. sustainable, responsible and impact investing grew by 76 percent in the last two years, to $6.57 trillion in 2014. These assets now account for more than one out of every six dollars under professional management in the U.S., according to the Forum for Sustainable and Responsible Investing.
It wasn’t all that long ago — the ’80s and ’90s — that much of Wall Street dismissed the concept of building a portfolio that reflected personal values and beliefs. The standard rap was that the strategy would cut into returns. The standard recommendation for investors who abhorred, say, smoking or environmental degradation was to pick investments that yielded the highest potential return. You could always donate your profits to the cause.
As Meir Statman, finance professor at Santa Clara University put it, this commonplace personal finance advice was “fundamentally flawed. In fact, it’s akin to suggesting to an Orthodox Jew that he forgo kosher food for cheaper nonkosher food and donate the savings to his synagogue.” It’s not going to happen.
Financial advisers these days take socially responsible investing seriously, especially since the approach is important to the younger generation. Scholarly studies and investor experience have shown that there really isn’t a financial penalty.
I have two primary recommendations for anyone interested in exploring the field. First, comparison shop on fees since levies vary considerably in this area and fees into returns. You’ll also want to research your investment options carefully. Marketing materials can be misleading and you’ll want to examine the underlying investments. For mutual fund type investments Morningstar.com has good data. Socialfunds.com offers a broader menu. The Forum for Sustainable and Responsible Investment is a window into the universe of sustainable investing.
Chris Farrell is senior economics contributor, “Marketplace,” and economics commentator, Minnesota Public Radio.