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Values-Aligned Investing: Find where client beliefs meet ESG themes

Values-Aligned Investing: Find where client beliefs meet ESG themes

What are the differences between different forms of Values-Based Investing? This guide helps showcase how each is different and could benefit clients of all backgrounds.

Jack Casady

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In this edition of The next era in ESG investing, we examine the different forms of values-based investing and how different client beliefs align with topics across ESG.

In our past editions, we've reflected that the SEC will not formally define what ESG investing is, but they will require an Investment process and methodology that is explainable, repeatable, and auditable. Part of that process, on our view, is having a solid foundation of the many forms of values-aligned investing so you know where your funds might sit in the new taxonomy of ESG funds, but also where your client base is looking to invest in alignment with. For some clients, they might look to maximize their impact in their investments, while others look to faith-based guidelines for inclusion, exclusion, and tilts for their portfolios.

Though ESG investing does have 3 main focuses of coverage; environment, social, and governance, how clients see these lanes in tandem with their beliefs allows for an extended lens to provide better, personalized investing for them to help maximize their investment potential and impact if that is their main consideration.

ESG (Environmental, Social, Governance):

ESG is gradually being baked into all financial analysis. As standards are developing and evolving, and regulators are playing catch up you can make the case for applying a specific investment approach to your clients. ESG investing is an analysis of risk/return profiles of companies using additional data. Think of it this way, ESG is a type of fundamental analysis and you can approach it the way you would any other conversation with your clients around financial performance.

When used by portfolio managers and financial professionals, ESG investing usually means incorporating financially-material environmental, social, and governance factors to improve the risk-adjusted financial performance of a portfolio.

When used by a client, ESG investing generally means the client is looking to invest in a portfolio that has a positive or at least avoids a significant negative impact on the world. While the majority of people see "ESG" as separate from political affiliation, some do associate the term "ESG" with more left-leaning values.

SRI (Social/Sustainably Responsible Investing):

SRI is the original term that was used to encompass all values-based investing. Now, SRI is usually associated with avoiding companies that do harm or staying focused on social impacts from investments. SRI is the practice of avoiding companies that don't align with a client's values (like tobacco companies) and investing in those that do (like renewable energy).

For clients, SRI investing aligns with their beliefs. They might want to exclude specific industries or producers of tobacco products, firearms, or alcohol and find investments with companies that give back to communities or better our planet in measurable ways.

For advisors looking to align their client's investments with their beliefs, it’s best to start by using a behavioral values questionnaire to find the areas they are firmly against and use it as a method to find what areas they do not want to be allocated in or aligned with.

Impact:

This term is often used to describe all types of values-based investing but often is associated with a deeper commitment to impact. Some impact investors are looking to invest in community institutions, or funds conducting shareholder advocacy.

Impact Investing is characterized by a direct connection between values-based priorities and the use of investors’ capital. These investments try to generate and quantify a positive societal impact. Impact investing commonly refers to private funds, while SRI and ESG investing typically involve publicly traded assets.

Impact conversations are not about financial performance. Impact conversations are about the values people hold dearly, and about getting to know your clients as people.

Impact investing is about how clients feel and where their passions lay. You will not need to convince clients of impact – they will either be very innately interested or completely disinterested. Impact Investing is a way to personalize the positive social impact of your client’s investments.

Faith-Based:

Faith-Based Investing is an investment strategy that aligns a person’s investments with their faith convictions. Investors typically implement faith-based investing strategies by avoiding investments in companies that conflict with their own faith-based principles. For example, it is common across many faith-based approaches to avoid investing in tobacco companies. Other faith-based investors might also underweight companies performing poorly on issues aligned to their faith. Finally, some faith-based investment guidance includes proxy voting and shareholder engagement recommendations to improve corporate impact.

The 3 main tenets of Faith-Based investing are:

Avoid, Affirm, and Advocate

Avoid: Assess their exposure to companies or industries that must be screened out for faith-based reasons. For example, investors can ensure their portfolio is tobacco-free.

Affirm: Assess their exposure to companies or industries that adhere to non-exclusionary faith-based principles. For example, investors can diagnose the toxic air pollution in their portfolios.

Advocate: Evaluate a fund manager’s shareholder engagement and proxy voting records.

You may also hear the terms "Biblically Responsible Investing", or "Shariah-Compliant Investing". Faith-based investors often get their guidance on ethical investing from faith-based institutions.

We hope that these definitions are helpful for both your practice and your clients. If you want to learn more, schedule a demo with our co-founder, Gabe Rissman, to see how values-aligned investing can fit into your practice and tools and workflows to make it easy and intuitive.

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