Portfolio Perspective

Values-based investing can be difficult to screen. Here’s what you need to know

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Key Points
  • As demand surges for values-driven investing, the Securities and Exchange Commission may scrutinize funds with sustainable, green or ESG labels.
  • These funds often lack clear impact metrics, making it difficult for consumers to build their preferred portfolio.  
  • However, there are a few ways for investors to gauge these funds, financial experts say.
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As demand surges for sustainable funds, it may be difficult for some consumers to identify what to add to their portfolios. 

Securities and Exchange Commission Chairman Gary Gensler shifted his focus to environmental, social and governance investing, known as ESG, in a recent statement. His team will explore climate- and workplace-related metrics, along with learning how funds market themselves. 

Investors added $51.1 billion of net new money into ESG assets in 2020, setting records for the fifth year in a row, according to Morningstar.

"I think the marketing is really tricky," said certified financial planner Phuong Luong, principal financial planner at Saltbox Financial in Newburyport, Massachusetts.

There aren't clear definitions of values-driven assets, even within the industry, which may confuse investors, she said.

Morningstar uses the term sustainable investing as an umbrella for approaches that use ESG criteria throughout the investment process. However, experts say there are important distinctions within the space.

Socially responsible investing, or SRI, started by removing certain sectors or industries from portfolios, such as tobacco or weapons, to align with an investor's values or religious beliefs. There's also a shareholder engagement component, Luong said.

A newer approach, ESG, is also values-based investing. However, funds may be more returns-focused, with broader criteria for portfolio assets. These funds may or may not participate in shareholder advocacy. 

In response to less rigorous ESG standards, impact investing focuses on the direct and specific effects of the assets themselves, said Rachel Robasciotti, founder and CEO of Adasina Social Capital in San Francisco.

"It's not just about what you say," Robasciotti said. "The metrics are about what you do."

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Measuring impact

Those interested in values-driven investing may struggle to measure their portfolio's impact because there isn't a set industry standard. While a company's commitment to fighting climate change may be easier to assess, other issues may be more difficult.

To me, the biggest and most important thing to look at is who decided that metric.
Rachel Robasciotti
Founder and CEO of Adasina Social Capital

"To me, the biggest and most important thing to look at is who decided that metric," Robasciotti said. Those working with an advisor may ask questions about their funds' metrics and effects.

For example, there's a difference between a fund manager deciding what's essential vs. implementing guidance from impacted communities, she said.     

Screening funds

One of the biggest challenges of screening values-driven funds is that there may be limited public information, said Luong.

For example, you may see names like "social" or "green," signaling the fund manager considers these issues. But investors may not have access to the criteria or data used to make decisions, she said.

"Traditional ESG data typically is proprietary, meaning behind a paywall," she said. However, there may be other ways for investors to access the data.

As You Sow is a nonprofit that measures environmental and social corporate responsibility through shareholder advocacy. The organization uses open-source, publicly available data from nonprofits and activists on the ground, said Luong. 

"I look at it as a starting point for advisors and the public," she added. 

As You Sow's Invest Your Values tools allow consumers to see which companies are part of their funds and decide if the holdings align with their values, such as climate issues, gender equality, guns, tobacco and more. 

Those motivated by racial justice may also explore Adasina's free impact data set

"What you're looking for is consistency and action," Robasciotti said.