For many of us, there is more to living our best life than trying to accumulate the most money. That ethos speaks to the growing popularity of investment choices based on values, including environmental concerns, religious beliefs and personal preferences. To satisfy that increased investor demand, investment firms now offer numerous mutual funds, separately managed accounts and exchange-traded funds (ETFs) that allow you to invest and live your values simultaneously. We will take a look at aligning your capital with your values in this week’s Inside Look at Building Towards Wealth.
You don’t necessarily have to give up investment returns to align your investments with your values, as the performance of many of these value-based investments is very competitive with other investment options. Many of these funds and ETFs post returns that align with, or even beat, the performance of the Standard & Poor’s 500 indexes. For example, according to research firm Morningstar, a group of 13 index funds that follow sustainable investing through U.S. large-cap stocks posted healthy gains ranging from 25.6% to 31.7% in 2021.
There are a variety of value-based investment options. Read on to learn what they are and whether they could be a fit with your portfolio.
ESG investing considers the Environmental, Social and Governance factors of a company to measure the overall impact of an investment. ESG investing is sometimes also known as social impact investing or socially responsible investing.
Environmental: These companies either focus on green technologies or work to reduce the impact of their operations on the environment.
Social: These are firms considered strong performers from a social lens, including respecting racial, gender and sexual diversity among employees and clients.
Governance: These are firms that are committed to a diverse board makeup, shareholder-friendly policies and fair executive compensation.
ESG investments are growing in popularity and are expected to continue attracting more money. According to Bloomberg Intelligence, assets in ESG investments are forecast to jump to $50 trillion by 2025 from about $35 trillion. Though younger investors are more likely to seek out ESG investing, according to a CNBC poll, there is growing evidence investors of all ages are taking more interest.
Are you interested in investing in companies with healthy ESG records? You can seek out companies based on how they report their records on ESG or check companies as ranked by several third-party research firms that measure companies based on their ESG factors. Alternatively, you can invest in mutual funds and exchange-traded funds (ETFs) specializing in stocks and bonds that meet ESG guidelines. Investing in a fund can help diversify your holdings and save time on doing your own research.
Faith-based investing, also sometimes known as value-based investing, aligns your portfolio with companies, funds or ETFs that comply with religious values. Though those values differ based on religion, most faith-based investing avoids companies that manufacture products that they deem immoral, such as firearms or alcohol manufacturers.
Here is a breakdown of faith-based investing options based on religion:
Catholic – Many funds following Catholic beliefs seek out companies that follow environmentally friendly operations and high labor standards. In addition, these funds avoid companies that generate significant revenue from gambling, weapons, or adult entertainment activities.
Jewish – Investors who align their portfolio with Jewish values try to carry out the Jewish mitzvot, or commandment, that they do good with their money. To follow these tenents includes favoring investments that work to improve social justice, climate change and community development.
Islam – Known as halal investing, funds catering to investors who follow Islam principles avoid alcohol companies and firms engaging in gambling, producing pork and pork products and financial firms that make money off interest.
If you’re looking to align your investments with your religious beliefs, consider a mutual fund or ETFs that aligns with the view of your religion.
Excluding Certain Types of Investments in Your Portfolio
In addition to ESG and religious options, there are also funds and ETFs that invest broadly but with an eye toward excluding companies from specific industries like tobacco, defense contractors or fossil-fuels. These funds are a good option if you’d like to ensure none of your investment money goes to a particular industry. Some ESG and religious-focused funds still hold money in industries many investors find objectionable, such as energy.
In addition to ETFs and mutual funds, a number of managers with customize a portfolio of individual stocks for investors interested in ESG and other forms of value-based investing.
The Bottom Line
If you’re looking to align your investments and your values, you now have many options, and you don’t necessarily have to sacrifice investment returns. A financial advisor can help you seek out the investment options that work to fit your values and complement your overall portfolio and financial goals.
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