I used to think that the hardest thing about investing was the battle between my personal values and making a profit. As investors, we all want to make money and sometimes we think that our values have to become an afterthought of that. Looking at the dictionary definition of the verb, invest, it means “to commit (money) in order to earn a financial return.” That is what most investors go for. I believe it is so much more than just ‘making money’. To me, investing, as Merriam Webster uses in their second definition, is “to involve or engage especially emotionally.”
Investing is not solely about making money, it is about investing in your values and the future. This is called Socially Responsible Investing (SRI). SRI backs up your values and personal beliefs with purchases and investments.
Environmental, Social, and Governance (ESG) are three categories that a lot of people use to judge the social responsibility of a company.
One approach is to categories to create guidelines based on your values. A common approach uses three categories: Environmental, Social, and Governance (ESG). ESG connects your values to your investments.
The ESG categories are helpful tools to screen companies. You can screen companies two ways, negative and positive. Negative screening is eliminating companies to invest in based on values that you don’t agree with. Here is an example of some personal values that came to mind, you don’t have to agree with them. These are some common personal choices:
Chemicals and agrochemicals
Controversial environmental behavior
Systematic lobbying of public institutions
Next is positive screening. Positive screening is the opposite of negative screening, but instead of eliminating companies you disagree with, you look for companies that promote values that you do agree with.
Black lives matter
Giving shareholders a say
Ethical managers and board members
Here are some keys to think about for SRI.
Long Term Mindset
SRI seems pretty logical, invest based on your values, so why don’t people do it? For one thing, not all investors are long term investors. For some environmental and social impacts you need to think 30, 40, or 50 years out. Some people don’t have that time, so it is much safer for them to invest in companies that will be popular in the next 5 years.
Adapting to Generation Gaps
Many millennials, and my generation (we are yet to be named), already think about being socially and environmentally responsible. Over the next 20-30 years, generational wealth transfer will happen, and signs point to there to be a large shift of mindset towards socially responsible investing. When the torch is passed to the next generations, the companies that investors invest will have much different values.
Direction of Change
As investors, this is a great opportunity to invest on the curve upwards. But for some trends you may need to have a lot of time, some because they are developing a new drug, others because switching to green energy sources takes time, etc.. Now the issue with having to maintain faith in a company for a long time is you can only predict so far into the future. For most companies, two years is hard to predict; 50 is much harder (almost impossible). That is a big struggle for investors to realize that it’ll be a risk now, but may be beneficial and profitable later. Some of these companies might only be an idea now, or forming in someone’s basement. Our goal, as investors, is to keep our eyes open for these companies and pounce as soon as possible.
Personal Values Connection
Most investors keep their private life and investing separate. Being socially responsible is something most people think as driving their car less, turning lights off when they leave the room, not running water when you don’t need it, etc.. But investing can make as much if not a bigger impact for the future. You have the power of your voice, your wallet, and your stock portfolio along with power over your actions.
When you become a shareholder, you are part owner of that company. You can vote on that company's decisions, of course there’s only so much you can do with that vote, but with ownership there is power. You have the power to put your money in companies you believe in.