Issue 27: 2014

Insights

Aligning Your Investments With Your Values

High-impact solutions are growing in sophistication and entering the mainstream.

Photograph by Jesse Burke

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Aligning investments with personal values matters to investors. In fact, according to the results of the 2014 U.S. Trust Insights on Wealth and Worth® survey, more than half of the individuals surveyed say that the social and environmental impact of their investments is important. And when it comes to women and young people, the numbers edge even higher (73% for both women and millennials, respectively, according to the survey). Still, despite this interest in socially responsible investing, only 25% of respondents have taken even the first step of reviewing their investment portfolio for its environmental or social impact.

Some of this hesitancy may be due to the fact that, at least in part, it can be incredibly confusing. Where do you start? The increasing popularity of socially responsible investing has, perhaps predictably, given rise to a bewildering number of terms and options. Socially responsible investing may appear most frequently, but you’ll probably come across sustainable and responsible investing (and, if that’s not confusing enough, both of these terms use the acronym SRI), and that’s just for starters. There are socially conscious, responsible, sustainable, impact, “green,” ethical and values-based investing approaches. And finally, ESG — environment, social justice, and corporate governance — investing, which is increasingly common and may well supplant other terms in coming years. (Related approaches in the religious sphere are often referred to as faith-based, or faith-consistent, investing.)

How do you wade through all of this and make sense out of the options? It’s not always easy, but it can be helpful to think about investment opportunities along a spectrum, with zero alignment with your values at one end and 100% alignment (where we also find philanthropy) at the other end.

Spectrum of Investments
From traditional investments to impact investments to philanthropy.Click to expand

So let’s begin on the zero-alignment end of the spectrum with financial-only investments — that is, when investments are chosen solely based on financial characteristics with no consideration given to ESG issues. (See the chart “Spectrum of Investments,” where this is the left end.)

The step away from financial-only investing is often referred to as responsible investing, and it tends to focus on negative screening. That’s where you would say “I don’t want any tobacco stocks in my portfolio,” for instance, or maybe you don’t want to own companies involved with alcohol or other vices, or companies involved with coal or engaged with governments of conflict countries, such as the Sudan. Those are some of the most common examples. In some cases, the rationale for this approach is both values alignment and risk management. For institutions in particular, there is an aspect of reputational risk in their investments. If, for instance, you’re a nonprofit organization focused on healthcare, and it comes out that a significant portion of your investment portfolio is invested in tobacco companies, you may have some explaining to do to your donors.

Our socially innovative investing strategy is focused on ESG investing methods.

Over the years, motivated by an increasing awareness that ESG factors are relevant to analyzing companies, investors have been moving from responsible investing toward sustainable investing. Here, investors select companies they believe will outperform the overall market over the long term, at least in part because they operate using more sustainable methods than their peers. Those methods may include innovations to deal with waste and drive down energy and water usage, and engaging with their stakeholders — employees, suppliers and customers — in more effective ways, which helps bring in better talent or build a stronger brand. Or maybe they have more effective corporate governance practices, such as board independence and diversity.



Dispelling the Myth of Poor Performance Click to expand
Dispelling the Myth of Poor Performance

Conventional wisdom has long held that socially responsible investment (SRI) practices inevitably result in poor investment returns. In this case, the conventional wisdom appears to be wrong. Recent analysis by Empirical Research Partners1 of two decades of research, more than 60 separate academic studies, has uncovered no statistically significant difference between the performance of SRI funds and non-SRI funds and other conventional stock market benchmarks.

Moreover, there is some evidence that companies with strong ESG characteristics tend to outperform the market in the long run. Interestingly, so-called vice companies also tend to outperform. While avoiding those companies can cause some performance drag, picking better companies on the ESG side of things can potentially provide an offset. It appears that doing good and doing well — for both investors and individual companies — are not mutually exclusive.

1Source: Empirical Research Partners, “Stock Selection: Research and Results May 2014,” Investment Ideas from the Ivory Tower, Perspectives on Socially Responsible Investing, May 19, 2014

At U.S. Trust, our Socially Innovative Investing strategy, known as S2I, offers an example of sustainable investing. The underlying belief of S2I is that social responsibility and corporate earnings should naturally go hand in hand. Michael E. Porter, the Bishop William Lawrence University Professor at Harvard Business School, perhaps said it best: “Corporate social responsibility can be much more than a cost, a constraint or a charitable deed — it can be a source of opportunity, innovation and competitive advantage.” To that end, Socially Innovative Investing is U.S. Trust’s framework for reviewing companies in the United States across a wide spectrum of social criteria and traditional fundamental factors. The process leverages 400 unique data points designed to measure how effectively a corporation is engaging human capital, environmental stewardship and community engagement practices. Rather than avoiding companies or sectors, S2I selects the top performers in each sector and uses a portfolio construction discipline that combines this social analysis with fundamental research and an optimization process.

Responsible, sustainable and thematic investing are all under the banner of fiduciary investing.

Moving away from sustainable investing on the spectrum, we find thematic investments. These are investments focused on an issue area where social or environmental needs are creating commercial growth opportunities. Osmosis, for example, is an investment management group that focuses on resource-efficiency strategy that was recently added to U.S. Trust’s investment platform. Osmosis's strategy examines companies’ energy consumption, water usage and waste creation in relation to revenue. Another example would be our S2I Women and Girls Equality strategy, which focuses on the increasing economic power of women, and the ways in which companies are thoughtful about engaging women as employees and leaders, in their supply chain, and in terms of the products and services that they provide.

Responsible, sustainable and thematic investing are all under the banner of fiduciary investing. With the prudent investor rule top of mind, these strategies look at potential returns first, examining how companies deal with ESG factors in ways that stand to positively impact their long-term value. The next step along our spectrum, impact first investing, flips these priorities to a certain extent. Here, impact-first investors are looking first and foremost to address a social challenge — e.g., low-income housing and homelessness, maternal mortality or hunger — with return-seeking investments, but with clear awareness that there may well be some financial tradeoff for doing so. That doesn’t mean that the investments won’t outperform, only that investors are willing to take risks that they won’t necessarily be compensated for. Bank of America is actually working in this space to de-risk impact investments, and to create opportunities — such as our recent social-impact bonds — for investors to address social issues and still seek market-rate returns.


Denis Scott/Corbis Images

 

Investing ethically and profitably is
no longer an oxymoron

Our experiences at U.S. Trust tell us that our clients are interested in integrating their values not merely into their philanthropy, but into all aspects of their lives. They are, for instance, increasingly doing so in their consumer choices — maybe with solar panels on their roofs, with fair-trade coffee at their breakfast tables or with pesticide-free fertilizer. And they want to want to make the same choices with their investments.

Thankfully, with improved technology and an ever-expanding array of options, it’s possible to achieve that kind of integration to the precise extent they wish to do so. Moreover, it no longer has to mean, if it ever did, that investments have to underperform. In the context of our rapidly transforming world, a world with a rapidly expanding population and dwindling natural resources, there are numerous factors that can be relevant to your values and also to corporate performance. Being ethical in your investing does not mean automatic compromises when it comes to your return goals.

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Stocks of small and mid cap companies pose special risks, including possible illiquidity and greater price volatility, than stocks of larger, more established companies.

International Investing
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Commodities
Trading in commodities, such as gold, is speculative and can be extremely volatile. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest-rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Tangible assets can fluctuate with supply and demand, such as commodities, which are liquid investments, unlike most other tangible investments.

Energy and natural resources stocks have been volatile. They may be affected by rising interest rates and inflation, and can also be affected by factors such as natural events (for example, earthquakes or fires) and international politics.

Other
The 2014 U.S. Trust Insights on Wealth and Worth® survey is based on a nationwide survey of 680 high-net-worth and ultra-high-net-worth adults with at least $3 million in investable assets, not including the value of their primary residence. Respondents were equally divided among those who have between $3 million and $5 million, $5 million and $10 million, and $10 million or more in investable assets. The survey was conducted online by the independent research firm Phoenix Marketing International in February and March of 2014. Asset information was self-reported by the respondent. Verification for respondent qualification occurred at the panel company, using algorithms in place to ensure consistency of information provided, and was confirmed with questions from the survey itself. All data have been tested for statistical significance at the 95% confidence level.

Aligning investments with personal values matters to investors. In fact, according to the results of the 2014 U.S. Trust Insights on Wealth and Worth® survey, more than half of the individuals surveyed say that the social and environmental impact of their investments is important. And when it comes to women and young people, the numbers edge even higher (73% for both women and millennials, respectively, according to the survey). Still, despite this interest in socially responsible investing, only 25% of respondents have taken even the first step of reviewing their investment portfolio for its environmental or social impact.

Some of this hesitancy may be due to the fact that, at least in part, it can be incredibly confusing. Where do you start? The increasing popularity of socially responsible investing has, perhaps predictably, given rise to a bewildering number of terms and options. Socially responsible investing may appear most frequently, but you’ll probably come across sustainable and responsible investing (and, if that’s not confusing enough, both of these terms use the acronym SRI), and that’s just for starters. There are socially conscious, responsible, sustainable, impact, “green,” ethical and values-based investing approaches. And finally, ESG — environment, social justice, and corporate governance — investing, which is increasingly common and may well supplant other terms in coming years. (Related approaches in the religious sphere are often referred to as faith-based, or faith-consistent, investing.)

How do you wade through all of this and make sense out of the options? It’s not always easy, but it can be helpful to think about investment opportunities along a spectrum, with zero alignment with your values at one end and 100% alignment (where we also find philanthropy) at the other end.

Spectrum of Investments
From traditional investments to impact investments to philanthropy.Click to expand

So let’s begin on the zero-alignment end of the spectrum with financial-only investments — that is, when investments are chosen solely based on financial characteristics with no consideration given to ESG issues. (See the chart “Spectrum of Investments,” where this is the left end.)

The step away from financial-only investing is often referred to as responsible investing, and it tends to focus on negative screening. That’s where you would say “I don’t want any tobacco stocks in my portfolio,” for instance, or maybe you don’t want to own companies involved with alcohol or other vices, or companies involved with coal or engaged with governments of conflict countries, such as the Sudan. Those are some of the most common examples. In some cases, the rationale for this approach is both values alignment and risk management. For institutions in particular, there is an aspect of reputational risk in their investments. If, for instance, you’re a nonprofit organization focused on healthcare, and it comes out that a significant portion of your investment portfolio is invested in tobacco companies, you may have some explaining to do to your donors.

Our socially innovative investing strategy is focused on ESG investing methods.

Over the years, motivated by an increasing awareness that ESG factors are relevant to analyzing companies, investors have been moving from responsible investing toward sustainable investing. Here, investors select companies they believe will outperform the overall market over the long term, at least in part because they operate using more sustainable methods than their peers. Those methods may include innovations to deal with waste and drive down energy and water usage, and engaging with their stakeholders — employees, suppliers and customers — in more effective ways, which helps bring in better talent or build a stronger brand. Or maybe they have more effective corporate governance practices, such as board independence and diversity.



Dispelling the Myth of Poor Performance Click to expand
Dispelling the Myth of Poor Performance

Conventional wisdom has long held that socially responsible investment (SRI) practices inevitably result in poor investment returns. In this case, the conventional wisdom appears to be wrong. Recent analysis by Empirical Research Partners1 of two decades of research, more than 60 separate academic studies, has uncovered no statistically significant difference between the performance of SRI funds and non-SRI funds and other conventional stock market benchmarks.

Moreover, there is some evidence that companies with strong ESG characteristics tend to outperform the market in the long run. Interestingly, so-called vice companies also tend to outperform. While avoiding those companies can cause some performance drag, picking better companies on the ESG side of things can potentially provide an offset. It appears that doing good and doing well — for both investors and individual companies — are not mutually exclusive.

1Source: Empirical Research Partners, “Stock Selection: Research and Results May 2014,” Investment Ideas from the Ivory Tower, Perspectives on Socially Responsible Investing, May 19, 2014

At U.S. Trust, our Socially Innovative Investing strategy, known as S2I, offers an example of sustainable investing. The underlying belief of S2I is that social responsibility and corporate earnings should naturally go hand in hand. Michael E. Porter, the Bishop William Lawrence University Professor at Harvard Business School, perhaps said it best: “Corporate social responsibility can be much more than a cost, a constraint or a charitable deed — it can be a source of opportunity, innovation and competitive advantage.” To that end, Socially Innovative Investing is U.S. Trust’s framework for reviewing companies in the United States across a wide spectrum of social criteria and traditional fundamental factors. The process leverages 400 unique data points designed to measure how effectively a corporation is engaging human capital, environmental stewardship and community engagement practices. Rather than avoiding companies or sectors, S2I selects the top performers in each sector and uses a portfolio construction discipline that combines this social analysis with fundamental research and an optimization process.

Responsible, sustainable and thematic investing are all under the banner of fiduciary investing.

Moving away from sustainable investing on the spectrum, we find thematic investments. These are investments focused on an issue area where social or environmental needs are creating commercial growth opportunities. Osmosis, for example, is an investment management group that focuses on resource-efficiency strategy that was recently added to U.S. Trust’s investment platform. Osmosis's strategy examines companies’ energy consumption, water usage and waste creation in relation to revenue. Another example would be our S2I Women and Girls Equality strategy, which focuses on the increasing economic power of women, and the ways in which companies are thoughtful about engaging women as employees and leaders, in their supply chain, and in terms of the products and services that they provide.

Responsible, sustainable and thematic investing are all under the banner of fiduciary investing. With the prudent investor rule top of mind, these strategies look at potential returns first, examining how companies deal with ESG factors in ways that stand to positively impact their long-term value. The next step along our spectrum, impact first investing, flips these priorities to a certain extent. Here, impact-first investors are looking first and foremost to address a social challenge — e.g., low-income housing and homelessness, maternal mortality or hunger — with return-seeking investments, but with clear awareness that there may well be some financial tradeoff for doing so. That doesn’t mean that the investments won’t outperform, only that investors are willing to take risks that they won’t necessarily be compensated for. Bank of America is actually working in this space to de-risk impact investments, and to create opportunities — such as our recent social-impact bonds — for investors to address social issues and still seek market-rate returns.


Denis Scott/Corbis Images

 

Investing ethically and profitably is
no longer an oxymoron

Our experiences at U.S. Trust tell us that our clients are interested in integrating their values not merely into their philanthropy, but into all aspects of their lives. They are, for instance, increasingly doing so in their consumer choices — maybe with solar panels on their roofs, with fair-trade coffee at their breakfast tables or with pesticide-free fertilizer. And they want to want to make the same choices with their investments.

Thankfully, with improved technology and an ever-expanding array of options, it’s possible to achieve that kind of integration to the precise extent they wish to do so. Moreover, it no longer has to mean, if it ever did, that investments have to underperform. In the context of our rapidly transforming world, a world with a rapidly expanding population and dwindling natural resources, there are numerous factors that can be relevant to your values and also to corporate performance. Being ethical in your investing does not mean automatic compromises when it comes to your return goals.

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Stocks of small and mid cap companies pose special risks, including possible illiquidity and greater price volatility, than stocks of larger, more established companies.

International Investing
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Commodities
Trading in commodities, such as gold, is speculative and can be extremely volatile. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest-rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Tangible assets can fluctuate with supply and demand, such as commodities, which are liquid investments, unlike most other tangible investments.

Energy and natural resources stocks have been volatile. They may be affected by rising interest rates and inflation, and can also be affected by factors such as natural events (for example, earthquakes or fires) and international politics.

Other
The 2014 U.S. Trust Insights on Wealth and Worth® survey is based on a nationwide survey of 680 high-net-worth and ultra-high-net-worth adults with at least $3 million in investable assets, not including the value of their primary residence. Respondents were equally divided among those who have between $3 million and $5 million, $5 million and $10 million, and $10 million or more in investable assets. The survey was conducted online by the independent research firm Phoenix Marketing International in February and March of 2014. Asset information was self-reported by the respondent. Verification for respondent qualification occurred at the panel company, using algorithms in place to ensure consistency of information provided, and was confirmed with questions from the survey itself. All data have been tested for statistical significance at the 95% confidence level.