This may seem counterintuitive, coming from an investment advisory firm, but you can get started in sustainable and responsible investing without our help.
With a few steps, you can be on your way to an investment portfolio that meets your need for financial returns, investment income AND social benefit.
Any investment program begins with a focus on a goal. How one achieves that goal will be determined by a number of factors: Choice and mix of investments, rate of savings, tax efficiency, time to reach the goal, etc. In this article, however, we will focus solely on the implementation aspect of a sustainable investment program — i.e., the tools and investment vehicles that will permit you to implement a sustainable strategy to meet your goals.
Step 1 — Articulate your values: “What matters to me?” “Am I an activist or a pragmatist?”
Your specific values, and the how intensely you wish to reflect them in your investment portfolio, will determine what vehicles are acceptable and which are not. Websites such as SocialFunds.com allow you to search for funds based on different social priorities. (This can be a good first step if you have very specific thoughts on how you’d like to invest.) If your priorities are more diverse, then looking for funds called “sustainable”, “responsible” or “ethical” may better suit your needs. Names can be deceiving, so look deeply at the fund’s objectives, restrictions and current holdings to determine that a fund meets your objectives.
Step 2 — Know what you already own: Without an understanding of their own specific holdings, no investor can assess of whether or not those investments meet their sustainability or social criteria. Morningstar.com’s tools display the holdings of any fund by simply entering a description or ticker symbol. Calvert, one of the oldest “social” mutual fund families, has incorporated a “Know what you own” tool into their website. This tool will identify those companies that don’t pass Calvert’s “Social Index” tests across any (or all) of four specific social categories. Between the two sources, you might have a better idea of whether or not your present investments run counter to your values.
Step 3 – Assess results and appropriateness: These websites and other sources may help you determine what investment vehicle fits your values, but performance can be illusive among active funds of all types. Additionally, all funds have operating costs, usually referred to as the “expense ratio”. The cost of managing the fund matters a great deal, and cost differentials often separate leaders from laggards.
Again, Morningstar is a great tool for assessing a fund’s performance, operating costs AND the risk profile. The site’s analysts often articulate the role that a particular fund should play in a portfolio — “core” or “supporting”. When scrutinizing performance, don’t ignore the volatility that the investors have endured along the way, keeping in mind that investing in two similar funds may not effectively reduce your overall risk. Finding funds that complement one another is worth the effort.
Step 4: Dig deeper: Do you want to know more about the companies in the portfolio? CSRHub is one of Boardwalk’s favorite sites for sustainability info and scores. Even without a paid subscription, there is much valuable content on the environmental, social and corporate governance records of hundreds of firms.
Step 5: Learn about “impact” investments: The idea that one can earn financial returns while creating a social good is embedded in the mission of social entrepreneurship. Companies such as RSF Social Finance are partners with Boardwalk Capital in helping investors of all sizes to connect with social enterprises and earn financial returns. Additionally, Boardwalk has screened dozens of funds for “accredited investors” (those who meet certain net worth or income thresholds) to invest in these profit-seeking but socially-focused companies. Taking equity stakes in small companies is undoubtedly risky, so such investments are expected to be a small part of any investor’s portfolio.
Putting it all together: Mutual funds are a good starting point for most investors. They provide expertise and diversification in a convenient format. ETFs (exchange traded funds) are a newer innovation that add tax effiency and cost savings that are hard to deny. So, don’t overlook ETFs just because you have never employed them. ETFdb.comand Morningstar are excellent sources of information on exchange traded funds. The number of unique alternatives for investors through these two formats is growing daily.
Drawbacks: While funds are a good start, customization is surely NOT their strong suit. Every fund investor shares the same portfolio. If the off-the-rack suit fits, it may be a great deal. And while ETFs are generally tax-efficient, most mutual funds are not, often distributing capital gains when you least want them.
If more customization and tax efficiency is needed, then separately-managed accounts like Boardwalk’s Global ESG Titans and ESG 50 USA strategies make sense. As individually-managed portfolios, investors in these strategies will see every holding (and know a lot more about them), and can request the exclusion of certain industries based on their unique values. (The customized portfolio is then managed to maintain the same risk profile as the model, but without the offending companies.) Low portfolio turnover (i.e., trading activity) also makes the portfolio more efficient in the recognition of capital gains.
What about other asset classes? Responsible bond funds are more difficult to find than are equity funds. Many investors will therefore need to find their own way to an acceptable path. Boardwalk’s focus on municipal bonds permits us to isolate a market segment we call “quality of life” bonds. We seek high quality borrowers (municipalities) who are building schools, water treatment facilities, hospitals and green space initiatives. Wherever we can find good credit quality, competitive yields and enhancements to the local quality of life, we believe this to be a win-win situation.
Did we skip the most important issues? You’ve made it to the bottom of this article and may be thinking, ”Why did he gloss over the most important parts — strategy and planning?” Rest assured, we do not. But each client is unique, and needs a personal solution to meet their objectives.
Asset allocation, portfolio construction, rebalancing for risk management, and tax efficiency analysis are part of what we do for each client, each day. We are happy to discuss any of these issues further, but you can get started now by deciding what matters most to you, and studying the wealth of resources and information that are available to responsible investors today.
The opinions expressed in this article are solely those of the author, Scott Sadler, Boardwalk Capital Management.
For more information, discuss this topic with your advisor or visit Boardwalk Capital Management.