Responsible Investing Options Keep Sprouting

Nearly $23 trillion of assets worldwide are managed using responsible investing (RI) strategies, a 25 percent increase since 2014, according to the Global Sustainable Investment Alliance. New funds focused on environmental, social and governance (ESG) issues have also doubled since 2014.1

RI used to suffer under the guise of a do-good passion project or something added to a portfolio because it’s “nice to have” rather than for its competitive performance. While companies focused on RI may take more time to turn a profit, they’re also more likely to have a solid foundation with prospects for long-term success.

Business practices prioritized by these companies include environmental efficiency, diversity and fair-minded human capital management as well as choosing like-minded board members to oversee these practices. These companies also are big on transparency, which is beneficial for investors who like to be in the know.2

RI has evolved from simply screening out companies that contradict its objectives, such as tobacco and firearms, to including companies proactively working to implement RI goals.3 If you’re interested in learning more about specific holdings or funds that fall into the RI category, we’re happy to help.

Some pundits caution RI investing is more about making the investor feel good than actual impact on environment or social issues. That’s because the only time investors place direct investments into a company is at the initial public offering (IPO) stage, or infrequent times a company may issue additional new shares to raise capital. Otherwise, the day-to-day share trading happens in the secondary market between buyers and sellers, in which the volume of money trading hands doesn’t actually go into the reserves of the company itself. The same is true for company bonds.4

As for performance, RI has a similar track record to other types of funds. Many fail to beat their benchmarks and underperform their non-RI counterparts, but then again, this is true of more than 80 percent of active money managers.5 The difference for RI investors is the knowledge their portfolio and values are aligned.

One area of RI involves real estate investment in “opportunity zones” located in certain urban, suburban and rural areas. Recent tax cut legislation offers a lower capital gains tax rate on investments in these zones, plus tax-free gains when the investment is sold. Funds of this type frequently require a $1 million minimum investment.6

RI initiatives aren’t limited to the U.S. Their popularity has increased all over the world, particularly in Western Europe. While the current U.S. administration has reversed many sustainable initiatives in areas like corporate environmental responsibility and climate change, RI is driven by investors, not politics, and is expected to continue growing regardless of the U.S. government’s ideologies.7

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1 Bloomberg. Oct. 2018. “See Clearly Now: Understanding the Ripple Effect of Responsible Investing.” https://www.bloomberg.com/news/sponsors/features/nuveen/responsibleinvesting-goes-mainstream/?adv=18951&prx_t=iQUEANAorAWSkPA. Accessed Jan. 12 2019.

2 Ibid.

3 Mary Baldwin. Florida Today. Dec. 17, 2018. “Socially Responsible Investing: How best to match money with your values.” https://www.floridatoday.com/story/money/2018/12/17/socially-responsible-investing-how-best-match-money-values/2336019002/. Accessed Jan. 12, 2019.

4 Rick Kahler. Black Hills Pioneer. MFS. Jan. 12, 2019. “Why socially responsible investing has a limited impact.” http://www.bhpioneer.com/opinion/why-socially-responsible-investing-has-a-limited-impact/article_9166e730-15f4-11e9-9b99-8f4db88f7476.html. Accessed Jan. 12, 2019.

5 Martin Whittaker. Forbes. Aug. 17, 2018. “Why Socially Responsible Investing Skepticism Is Healthy.” https://www.forbes.com/sites/martinwhittaker/2018/08/17/why-socially-responsible-investing-skepticism-is-healthy/#68a3ba50467e. Accessed Jan. 12, 2019.

6 Paul Sullivan. The New York Times. Nov. 9, 2018. “A Big Tax Break for Socially Responsible Investing.” https://www.nytimes.com/2018/11/09/your-money/tax-breaks-opportunity-zones-investment.html. Accessed Jan. 12, 2019.

7 Forbes. Oct. 3, 2018. “Why Responsible Investment Is Here To Stay.” https://www.forbes.com/sites/nuveen/2018/10/03/why-responsible-investment-is-here-to-stay/#30eb05402008. Accessed Jan. 12, 2019.