How to Match Your Investments to Your Values

Values-based investing is going mainstream. Here's what to know — and how to add these choices to your portfolio.

by Teri Cettina - October 09, 2017

Many investors today want their portfolios to do more than offer reasonable financial returns: They want their investments to support companies and causes that align with their values. This investing approach goes by many names, including sustainable investing, ethical investing, impact investing, or Environmental, Social, and Governance (ESG) investing.

Jon Ellenbogen is President of Impact Capital Strategies, a member of the Wells Fargo Advisors Financial Network. His firm places special focus on ESG investing and recognizes the increased interest in ESG investing. He points to a recent Barron’s article indicating that more than $22 trillion in global funds are now managed according to ESG investment strategies — an increase of 25% over the past two years.

What is ESG investing exactly? ESG refers to the three primary factors investors tend to consider when evaluating a company or investment fund’s impact on the larger world:

  • “Environmental” refers to a company’s positive impact on the natural world.
  • “Social” is a company’s contribution to its communities, employees, and other stakeholders.
  • “Governance” means the performance of a company’s leadership.

Exclusive vs. inclusive investing

ESG investing isn’t a new concept, says Ellenbogen. Instead, he sees it as the evolution of an investing option known as Socially Responsible Investing (SRI). According to Ellenbogen, SRI primarily used an exclusive approach to investing — screening from portfolios any companies or funds that negatively impacted society or the environment.

ESG investing, on the other hand, is an inclusive strategy — proactively including in portfolios companies and funds that make positive efforts around social impact, environmental health, and responsible corporate governance. “Some investors even go one step further and use their voices as company shareholders to insist that the corporations and organizations in which they invest money switch to more ethical and sustainable practices,” explains Ellenbogen.

According to Barron’s, more than $22 trillion in global funds are now managed according to environmental, social, and governance investment strategies — an increase of 25% over the past two years.

More than a “feel-good”

One myth of ESG investing is that investors must be willing to accept lower financial returns if they invest in companies and funds that employ ESG strategies. While past performance is not a guarantee of future results, studies show that many companies that pay attention to these important issues tend to reduce their overall financial and social risks, notes Ellenbogen. At the same time, firms tend to increase their reputation and overall performance.

“The result is that in many cases, these companies tend to remain more financially stable over time and their shares may hold strong or increase in value,” he explains. For instance, a company that reduces its waste via recycling may positively impact the environment, save significant money, and attract and retain values-minded customers all at same time.

The bottom line for you, as an investor: “Based on our research, a portfolio invested in ESG-focused investments has the potential to perform just as well or possibly better than a more traditional portfolio,” says Ellenbogen.

Adding values-based investments to your portfolio

Your Financial Advisor can help you increase your portfolio’s ESG attributes in many ways. “It starts with a frank conversation about what’s important to you,” notes Ellenbogen.

For instance, do you feel strongly about supporting companies that use carbon-neutral practices? Would you prefer to avoid companies that focus on weapon development or tobacco production?

“Once your Financial Advisor knows what you care about, he or she can help you make sure your portfolio reflects your deeply held values,” says Ellenbogen. In fact, thanks to a number of financial databases and tools that allow Financial Advisors to research companies’ and funds’ sustainability ratings in regard to ESG and related factors, advisors can use an ESG “lens” on investments in almost every market sector and to accommodate almost any level of financial risk.

For more information on applying ESG investing strategies to your portfolio, contact your Wells Fargo Advisors Financial Advisor.

Teri Cettina is a personal finance writer based in Portland, Oregon, and a frequent contributor to Lifescapes.

Image by iStock

Additional Resources

Learn how behavioral finance may factor into investment decisions.

Keep in mind that all investing involves risk including possible loss of principal. A strategy’s social policy could cause it to forgo opportunities to gain exposure to certain industries, companies, sectors or regions of the economy which could cause it to underperform similar portfolios that do not have a social policy. A socially responsible investment style may shift in and out of favor.