In 2020, in the midst of an election year, a global pandemic, and massive social justice protests, many investors have questioned themselves and their investing habits.
Included in this movement are large scale boycotts to influence companies to uphold the social values and responsibility of the time. Most famously, this happened with Starbucks after it banned employees from wearing Black Lives Matter paraphernalia.
At the height of the protest surrounding the deaths of George Floyd and Breonna Taylor, dozens of companies released statements in support of Black Lives Matter. This included companies like video game maker Electronic Arts, DoorDash, and Uber. Even the National Basketball Association painted the phrase on its courts and allowed players to choose between 29 phrases some including: “Equality,” “Say Their Name,” and “Anti-Racist.” Netflix may have made the strongest statement and committed $100 million to support Black communities.
Social justice, systemic racism, and finance have always been linked. There isn’t a single industry in the United States that has not been touched or influenced by the legacy of slavery, segregation, or the disenfranchisement of women. It is no secret that the United States economy was built on slavery, but many of America’s oldest and most prestigious colleges were also built from this nefarious institution. The University of Virginia, the College of William and Mary, Harvard, and Georgetown are just a few. Over the last decade, many of these schools have begun acknowledging the role they have played in upholding slavery and put in measures to atone for it.
Is It Possible to Invest According to Your Values?
With these events and acknowledgments featured prominently in the news, many investors have asked whether or not their investing strategies should match with their values — and if it is even profitable to avoid investing in companies that may not align with who you are as a person. Additionally, if you wanted to commit to investing your money only with companies that align with your values, is there a feasible way to do this while also being responsible in terms of the risk you’re taking in the market?
Thankfully, these questions are not new and there is an entire field dedicated to Socially Responsible Investing also known as SRI. Similar to the issues of today, SRI emerged in the 1960s as a result of the Vietnam War. Protesters demanded that universities divest their endowments from weapons manufacturers and other companies that profited from the war. Similarly in 2019 students at Harvard demanded that the school divest its money from the fossil fuel industry. The City of New York also made a similar move to divest from fossil fuels beginning in 2018.
As concern for the environment and other social movements gained steam the first SRI mutual funds were born: the Pax World Balanced Fund and the First Spectrum Fund in 1971. Both funds were relatively small, according to the New York Times, First Spectrum only raised $200,000. Things began to change with the Dreyfus Third Century fund that began with $25 million in 1972 with the goal of investing in companies that were, “contributing to the enhancement of quality of life in America.”
By the 1990s, SRI was an established investing niche to help investors put their money into areas they could feel comfortable with while also increasing their own financial security. 1990 was also the year the Domini 400 Social Index was formed (now known as the MSCI KLD 400 Social Index). This index tracks 400 companies out of nearly 3,000 of the largest U.S. publicly traded companies and rates them on their environment, social and governance ratings (ESG).
Where to Put Your Money if You Want to Use SRI
Today, there are a few primary areas that individuals can invest according to their values. One of the most popular is by simply avoiding investing in companies that you disagree with. While this will always be dependent on your individual goals. For many, it means avoiding what many call “sin stocks” — companies involved in tobacco, alcohol, and gambling. For others, this may also include private prisons and weapons manufacturers.
Second, there are a number of investing apps today that make it much easier to find and invest in companies that align with your interest. For example, the investing app Public has a list (also known as a theme) of companies called Growing Diversity which features more than 20 stocks that are “setting the bar for diversity and inclusion.” In 2019, Fidelity launched a Women’s Leadership Fund (FWOMX), this fund invests in companies that included women in key roles with at least one-third of its Board seats held by women. As of today some of the companies in this fund include Microsoft, Adobe, Salesforce, and Disney. Even the NAACP, the nation’s oldest civil rights organization has a fund that ranks companies according to minority empowerment metrics.
No investment is perfect, however. You need to do your due diligence to see if a company or a fund matches up with your values. How you define women in leadership or minority empowerment may be different than those who manage these funds. One example of this is the NAACP fund. On the fund’s website, it lists Wells Fargo as one of its holdings. While Wells Fargo represents less than 1% of the overall money invested, the company has had a history of discriminatory practices in recent years. (It is important to note that the NACCP does not manage the fund but does lend it’s branding to Impact Shares who manages the fund.)
Is it Profitable?
It can be difficult for any fund or individual stock to beat the market consistently without taking on additional risks. Profitability is also determined on which area you feel most comfortable investing in. Tech and healthcare companies right now are performing better than the overall market but that may not be the case in the future.
With regard to the funds that were mentioned in this story, the NACCP Fund and the Fidelity’s Women Leadership Fund have outperformed the stock market over the last two years at nearly 28% and 21% gains respectively versus the S&P 500 at just 17%.
With more than 50 years of history, there is no shortage of ways that you can find investments that are both socially responsible and profitable to help you increase your own financial security while also improving the environment and society at large.
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