How to get started with Socially Responsible Investing.
Align your values with your investments — without compromising returns.
As social justice and climate issues become more of a concern for many, decisions around how we shop, eat, and live are often being made with our community responsibility in mind.
For those thinking about how to align their values with their spending, Socially Responsible Investing (SRI) can be an important piece of the puzzle. It considers both financial return and social and environmental impact, giving investors the opportunity to make more conscious investment decisions.
There are a variety of approaches for socially responsible and sustainable investing — and often the best place to begin is to understand your values and priorities. Where do you go from there? Follow these four steps to help kick off your SRI journey.
1. Get clear on what matters most to you.
You don’t have to choose between your long-term financial goals and investing in responsibly managed companies — with the options available today, you can make investment decisions that will lead to good financial outcomes as well as have a positive impact. And you can take it one step further, by defining when and how you might prioritize one over the other. Whether you’re driven more by performance or purpose, and build your portfolio accordingly.
Taking time to reflect on your values can also help you invest in a more meaningful way. Where do you stand when it comes to environmental responsibility, social impact, and corporate governance? What matters most to you? Are there things that you absolutely will not tolerate when it comes to investments? If you take a look at your lifestyle and the areas you tend to focus on most, this can provide a roadmap for your investment decisions. For example, if you’re committed to reducing waste and are living a “green” lifestyle, you may not want to invest in companies that are causing harm to the planet. If you’re committed to shopping locally, supporting small, women-owned, BIPOC-owned businesses, you may want to look for funds that have a similar mandate.
Not totally sure where you stand? There is a wealth of resources online that can help. For example, BMO’s MyESG™ is an easy, interactive tool that helps you recognize your approach to investing, get clear on what you value, and determine what kind of investor you are.
2. Determine how your current portfolio aligns with those values.
If you’re investing by purchasing individual stocks, you probably know exactly what’s in your portfolio. Many of us use investment vehicles that group a broad basket of stocks from a variety of companies together — like with a mutual fund, exchange traded fund (ETF), or index fund. This means you could be inadvertently investing in companies that manufacture weapons or tobacco, have environmentally detrimental impacts, or don’t pay their manufacturers a living wage.
You can find information online about the stocks held in funds, but a financial professional can help you look more closely at your existing portfolio, determine where you’d like to make a change, and direct you toward more socially responsible choices. If you’re serious about only investing in companies that align with your values, there are a number of investment products that are specifically designed to help you do this, which can take a lot of the research and guesswork out of the equation.
3. Understand the various ways you can make investment decisions.
It is often assumed that socially responsible investing means excluding stocks or companies based on their practices or ethics — and virtually all SRI avoids investment in sectors that are detrimental to the environment and are deemed to have an adverse effect on society — but not investing in certain industries is just one part of the equation.
Investors may also consider positive inclusion, which means investing in stocks that promote a social benefit such as green energy, healthcare technology, and sustainable manufacturing. Thematic investing is another form of SRI where a portfolio is made up of companies that all focus on a similar theme, such as BIPOC-owned businesses or sustainable food production, for example.
4. Know the investment approaches available to you.
Depending on your goals and needs, the approach you take to sustainable investing can differ slightly — so it’s a good idea to know the difference between the investing strategies available to you. ESG funds, for example, use a framework that considers three factors when selecting which companies to support: environmental (the effects on the earth), social (the impact on society), and governance (how the company is run). The priority here however remains financial return. Impact Funds require every investment to have a positive social or environmental impact, giving increased priority to advancing social goals, even before financial gain.
You can also decide between working with an investment professional or taking a DIY approach through a self-directed account. Depending on the route you take, the products that are available can change. For example, with an investment professional you can gain access to ESG solutions such as the newly launched BMO Sustainable Portfolios, a professionally managed suite of portfolios that invest in companies committed to ESG outcomes. If you are looking to add ESG ETFs to your self-directed portfolio, BMO has expanded the range of ESG ETFs including the BMO Balanced ESG ETF (ZESG).
As Socially Responsible Investing continues to gain momentum in the US and Canada, the number of products available is growing — but before you get to making those detailed decisions, don’t skip the self-reflection needed to know if taking a values-based approach to investing is right for you, and the ideal way to approach it to meet your goals. If you’re in doubt, it’s always best to ask a professional for guidance.