Key Takeaways:
• Understand the fundamental difference between ESG scoring and values-based investing
• Learn how to implement precise, client-centric investment approaches
• Leverage active ownership for deeper client engagement
• Monitor and adapt to corporate evolution over time
What is Values-Based Investing?
Values-based investing has deep historical roots, tracing back to the 1700s when the Quakers and MethodistChurch began advocating for the alignment of financial practices with personal values. Their early screening of "sin stocks" - investments in industries like tobacco, alcohol, and gambling - laid the foundation for what we now call values-based investing. John Wesley's fundamental principle that where you spend your money matters continues to resonate today.
Historical Foundation vs Modern ESG
• Traditional Approach: Client values drive investment decisions
• ESG Approach: Top-down scoring systems determine investment criteria
• Key Difference: Client autonomy vs. standardized metrics
Why ESG Falls Short of Actual Values Alignment
ESG investing has become increasingly prevalent in the financial industry, but it's crucial to understand its limitations. ESG functions primarily as a risk mitigation tool, often missing the nuanced values and priorities of individual investors.
Understanding the ESG Gap
• Standardized scoring systems may not reflect individual priorities
• Top-down approach limits customization
• Risk mitigation focus rather than values alignment
The Power of Precision in Values-Based Investing
Client-Centric Portfolio Management: Customized values-based investing offers more precise control over portfolio composition, allowing advisors to:
• Exclude specific corporations based on client preferences
• Adapt holdings as client understanding evolves
• Implement exact metrics rather than general scores
Case Study: The Evolution of Values Through Electric Vehicles
This real-world example demonstrates how client perspectives evolve and why precise portfolio tools matter:
Five years earlier, a client invested in electric vehicles and installed solar panels on their roof, believing they were contributing to a better world by reducing air pollution from combustion engines. Their initial values aligned perfectly with sustainable transportation and clean energy.
However, as time passed, they learned more about the reality behind EV production. The same client who had previously chosen to divest from mining corporations due to environmental concerns discovered that the batteries powering their sustainable choices required precious and rare earth metals - the very mining operations they had sought to avoid.
This is where the utilization of values-based investing comes into play: the ability to adapt to new knowledge.With precise screening tools, clients can:
• Adjust their portfolio as their understanding evolves
• Maintain alignment with their core values
• Make informed decisions about complex trade-offs
• Implement exact metrics rather than relying on general scores
This evolution in understanding demonstrates why values-based investing must provide both precision and adaptability. It's not about changing values - it's about having the tools to better express those values as knowledge deepens.
Active Ownership: A Powerful Tool for Change
The power of active ownership in values-based investing becomes particularly significant when we consider the current investment landscape. While many investors hold ETFs where large institutions control voting rights, direct share ownership provides clients with crucial voting powers that would otherwise be delegated to major financial institutions.
The Importance of Direct Ownership
• More control over proxy voting rights than voting with a mutual fund or ETF
• Direct participation in shareholder resolutions
• Independence from institutional voting decisions
• Real influence over corporate behavior
Remember: "Every holding in our portfolio matters." When clients own individual shares rather than just ETF positions, they maintain direct control over their voting rights and their ability to influence corporate behavior.
Corporate Evolution and Long-term Monitoring
A critical aspect of values-based investing is understanding that corporations change over time. Advisors must:
Track Corporate Changes
• Monitor behavioral shifts
• Evaluate restructuring and acquisitions
• Assess ongoing alignment with client values
• Adjust holdings as needed
Respond to Corporate Evolution
Some corporations have:
• Changed their entire structure
• Removed themselves from certain markets
• Been incorporated into other entities
• Modified their practices significantly
This dynamic nature of corporate behavior requires ongoing attention and portfolio adjustment to maintain alignment with client values.
Professional Implementation for Financial Advisors
Maintaining Professional Standards: As values-based advisors, maintaining professionalism while serving diverse client values requires:
• Objective portfolio management
• Non-judgmental client interactions
• Focus on client comfort and alignment
Best Practices for Client Service
- Listen without judgement
- Create space for honest dialogue
- Maintain professional distance from personal values
- Enable portfolio adaption as needed over time
Frequently Asked Questions
Q: How does values-based investing differ from ESG? A: Values-based investing takes a bottom-up, client-centric approach, while ESG applies top-down scoring metrics for risk mitigation.
Q: Can portfolios adapt as client values evolve? A: Yes, precise tools allow for ongoing portfolio adjustment as clients gain new understanding and perspectives change.
Q: How do advisors manage different value systems? A: Professional advisors maintain objectivity and focus on implementing client values, regardless of personal beliefs.
Conclusion: The Future of Values-Based Investing
The investment industry is returning to the actual principles of values-based investing, moving beyond standardized ESG metrics to authentic client alignment. Through active ownership and careful monitoring of corporate evolution, advisors can help clients not just invest according to their values, but potentially influence corporate behavior in meaningful ways.
Ready to enhance your practice with actual values-based investing? Start by evaluating your current approach to client value alignment and consider how precision tools and active ownership strategies can improve your service offering, such as YourStake's Values Hub solution.
By Kenneth Silva Ballard, CSRIC®, Investment Advisor Representative of First Affirmative Financial Network, LLC.
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