The environmental part is easy enough to understand, and there are plenty of yes-no questions you can ask about how a company governs itself. But “social,” an echo of “socially responsible,” could mean nearly anything.
Jon Hale, who is the director of what the research firm Morningstar refers to as “sustainable investing,” suggests that people begin with two questions. First, do you want to align your investments with the transition to a low-carbon economy? Second, do you want to contribute to the development of a global economy that works for more people?
If you answer yes to either, you’re a candidate for sustainable investing. And you can move on to the next challenge.
MEASUREMENT What funds are worth considering, and who evaluates them?
In a report in January, Morningstar published a list of 235 funds that you could use as a kind of menu. In 2016, the company also introduced a “sustainability rating” for more than 20,000 funds of all sorts. It describes the rating as a measure of how well funds handle environmental, social and governance issues compared with their peers.
There is no substitute, however, for examining the actual holdings of any fund. You never know, for instance, when a coal stock may somehow end up in your socially responsible fund. If that happens, it is worth figuring out why and determining whether it’s a deal killer for you.
EXCLUSIONS What do you not want in your portfolio and why?
In the first couple of decades of sustainable investing, the funds that aimed to invest on principle often avoided, say, oil stocks. Some of this still goes on today. One fund company called Inspire, according to one of its prospectuses, avoids companies that have “any degree of participation in activities that do not align with biblical values.” It includes among that list “the LGBT lifestyle,” without further elaboration.
Do you want gun stocks out of your portfolio? There may be mutual or exchange-traded funds that exclude them, but how far do you want to go? Publicly traded retailers like Walmart and Dick’s Sporting Goods sell guns, after all, even if they don’t make them. (This week, both companies announced new restrictions on gun sales.)
PERFORMANCE The knock on this group of funds has always been that they tend to underperform the closest comparable index fund. That notion, however, may prove to be outdated.
A 2015 study in the Journal of Sustainable Finance & Investment, which rounded up and examined about 2,200 pieces of research, found that about 90 percent of those studies showed no negative relationship between concern for social factors and corporate financial performance. A large majority, in fact, showed positive findings that were stable over time.
COST AND DIVERSIFICATION If you’re a committed index fund investor, seeking to own every stock or bond (or every sustainable one) in a particular market segment (say, small European companies), it may not be easy to do so cheaply if you can at all. And low costs, after all, are a primary attraction of index funds.
Betterment, one of the so-called roboadvisers that use software to put people in inexpensive portfolios, introduced its socially responsible investing offering last year. The company announced it with an accompanying written lament about how it simply could not find low-cost ways to put customers in any comprehensive, socially responsible market-spanning funds except for ones that invest in large United States stocks.
“Currently, most accessible S.R.I. approaches make investors choose between a well diversified, low-cost portfolio and an inadequately diversified and/or higher-cost portfolio comprised of S.R.I. funds,” wrote Alex Benke, who is now company’s vice president of financial advice and planning.
ACCESS Many people make the majority of investments through workplace retirement plans, but so far most employers haven’t included these sorts of funds in the offerings for 401(k) and similar plans.
According to one industry study of 421 plans, just 14 percent offered at least one sustainable fund and only about 1 percent of assets ended up in the investments. Employers these days are reluctant to make their investment menus too long, so it is hard for any fund that is not plain vanilla to make the cut. Bloomberg is one exception; it guessed correctly that some employees would embrace the option.
CONTROL At first glance, Wealthfront’s approach to socially responsible investing is a sort of fantasy version of investing for control freaks. People who have more than $100,000 in a taxable account (which means individual retirement accounts are not eligible) can ask the company, which is a roboadviser, to strip individual companies out of their stocks holdings.
Angry at Wells Fargo? Kick it out of this part of the portfolio. Dive into the details and other restrictions, however, and it becomes clear that you still may end up with exposure to many of the companies that you deselect in other parts of your Wealthfront stock and bond portfolio.
Still, the concept is tantalizing. If every investment adviser could invest directly in thousands of stocks and bonds for each customer (and didn’t simply buy inflexible mutual funds or exchange-traded funds), we all could apply our own social screens and excise any company that did not meet our own idiosyncratic standards. (At Wealthfront, some investors seem fond of dropping the big banks that nearly destroyed the economy in 2008.)
So is this the future for fans of sustainable stock and bond screening? Divesting in this fashion is one form of protest. But staying in a stock and confronting the company is another.
BlackRock, which owns the iShares exchange-traded funds, said on Friday that it had already had constructive conversations with some gun manufacturers and is considering whether it should create funds that exclude gun manufacturers and retailers.
At Betterment, Boris Khentov, vice president of operations and the company’s legal counsel, imagines a time not too long from now when index-fund investors, who lack actual shareholder voting privileges at individual companies, can use self-organized social media campaigns to pummel the management and board members of misbehaving companies.
That sounds almost as much fun as knocking a company out of your portfolio. Is he building such a social campaign system? “It’s not on the immediate road map,” he said. “But we’re dreamers.”