Much of the allure of socially responsible investing comes from its do-well-by-doing-good philosophy. But achieving that goal is not as simple as it sounds.
Debates erupt frequently about what constitutes a socially responsible company or what screening criteria to use (or not use). Clashes even occur over the nomenclature, with some favoring “sustainable investing” and others preferring “ESG [environmental, social and governance] investing” or “impact investing.”
“With everybody defining things how they want to see it, you have this massive amount of confusion,” said William Burckart, president and chief operating officer of the Investment Integration Project. “It’s still the somewhat early days in this industry.”
Perhaps the biggest debate is what qualifies as a socially responsible investment in the first place. With an ever-growing number of consultants and investment firms offering screenings and ratings, it’s hard to identify which stocks or mutual funds pass muster.
“Socially responsible investing is a catch-all phrase,” said Sanjay Das, a certified financial planner in Seattle, Wash. “I tell clients there’s no such thing as a perfect investment. All things can be skewed.”
Consider ETFs such as the SPDR SSGA Gender Diversity Index ETF SHE, -0.51% and the Etho Climate Leadership U.S. ETHO, -0.83% . These products focus on gender diversity and low carbon impact, respectively, and can satisfy investors who emphasize these societal goals.
Yet some experts argue that it’s better to broaden your horizons than limit what you’re willing to own based on your most cherished values.
Allan Moskowitz, a certified financial planner in El Cerrito, Calif., says he understands that some people care deeply about a specific subject such as employees’ working conditions and will prioritize it over other worthy causes in selecting their investments. But he’s also a proponent of prudent diversification.
“As a fiduciary, I think people need to have a broader approach with your core investment covering a wider swath of the market,” he said. “We call it the ‘core and explore’ strategy, where your core is a diversified portfolio [of highly rated ESG stocks] and if you’re really interested in a specific area, you can have a smaller concentration in that.”
Another potential problem with narrowing your focus is that a stock that scores highly in your preferred metric might disappoint you in other ways. There are dozens of criteria that analysts use to rate a company’s social impact (or lack thereof), and few earn across-the-board raves.
“Would you invest in a company that has gender equality but has [questionable] child labor practices,” said Axel Pierron, managing director of Opimas, a Boston-based consultancy. “That’s the benefit of a broader index” that casts a wider net for companies that meet certain standards.
A related debate involves whether individual investors should select a financial adviser who conducts independent research and assembles proprietary ESG portfolios versus a planner who turns to third-party data providers to screen stocks and bonds. Entrusting your investments to an adviser who’s reading prospectuses and investigating the inner workings of companies for, say, military weapon sales can prove reassuring. But you might overlook valuable resources produced by an ever-growing roster of outside experts.
Das, the Seattle-based CFP, uses research firms and asset management programs that maintain lists of companies for inclusion in various socially responsible categories. He asks clients to pick their three or four “deal-breaker issues” and then review lists of possible stock candidates that fit an individual’s preferences.