In my 29 years as a financial advisor, I've helped hundreds of clients establish portfolios that fit with their unique goals, risk tolerances and time horizons.
The financial confidence that this can provide is gratifying on its own, but in recent years we've added another dimension that has brought more meaning to the conversation: how to align clients' investments with causes they care about.
This approach is commonly referred to as socially responsible investing. At its core, SRI is an investment strategy that favors companies and causes with positive environmental, social and governance (ESG) practices.
Investors who engage in SRI make investment decisions based on a mix of traditional performance factors and their own personal values.
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SRI has caught on broadly in recent years and now accounts for nearly one-fifth of the money under professional management. In the U.S., it is estimated that there is more than $7 trillion in SRI-linked investments. This number has nearly doubled since 2012.
In my experience, it's an approach that resonates especially strongly with women and young investors. I've had numerous conversations with clients in these two categories about SRI, and I'm continually inspired by the passion they demonstrate for finding ways to align their money with causes they support.
My own observations are backed by industry research. A recent study from Ameriprise Financial uncovered that nearly 40 percent of female investors seek to invest in companies with good ESG practices. The same study showed that the vast majority of millennial investors (84 percent) are interested in socially responsible investments.
As these groups come to command more of the nation's wealth, they're likely to fuel more growth in the SRI space.
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Women control nearly $11.2 trillion in U.S. assets, and in addition to earning their own money, they are expected to inherit roughly 70 percent of the $41 trillion in intergenerational wealth transfer over the next 40 years.
Meanwhile, there are approximately 92 million millennial Americans, according to the U.S. Census Bureau, many of whom will be reaching their peak earning and investing years over the same time period.
When first introduced, SRI focused on evaluating companies using negative screens designed to avoid unfavorable activities, such as manufacturing guns, alcohol or tobacco. Because this took many investment options off the table, people worried that the screens could hurt their investment returns.
Today, impact investing looks at positive screens, which allows investors to focus on what they support with their dollars instead of what they want to avoid.
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With this shift to positive screening, women and younger investors who are interested in SRI have ample opportunity to get involved. Thanks to advances in technology and a shift toward greater corporate transparency, we're able to evaluate investment opportunities on the basis of their ESG performance and focus on those that align most closely with clients' values better than ever before.
But does this emphasis on social responsibility come at the sake of investment performance?
"As with any financial move, the decision to engage in SRI should be made in the context of an overall financial plan."
Actually, there's evidence to the contrary. New data has shown that ESG considerations may add to investment performance. One prime example of this is the MSCI KLD 400 Social Index, which screens out companies with poor ESG attributes. The index outperformed the S&P 500 Index by an annualized basis of 81 basis points from its June 1990 inception through 2014.
As with any financial move, the decision to engage in SRI should be made in the context of an overall financial plan. Women and young investors looking to diversify their portfolios, effect positive change and concurrently work toward their financial goals should seek help from a trusted professional who can help them navigate the myriad options and exciting opportunities in the impact-investing space.
—By Geri Eisenman Pell, CEO of Pell Wealth Partners
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