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Inclusive or Exclusive Approach to SRI: Which Is Right for You?

By 3p Contributor


By Brendan Erne

Socially responsible investing isn’t new by any means, but it is enjoying a surge in popularity. Whether it’s driven by the increasing awareness of environmental issues, workplace inequalities, or other social issues, there’s a palpable urgency to do better by both our fellow humans and the environment. Investing is also reflecting this trend.

In 2018, socially responsible investing accounted for more than $6.5 trillion of professionally managed assets, and some of the world’s biggest brands are jumping on board. Ford, for example, announced last year that its Ford Foundation would commit $1 billion toward socially responsible investments.

Ford isn’t the only company applying pressure to prioritize social responsibility. Larry Fink of BlackRock has spent years advocating for stronger management from global CEOs on social responsibility. The company plans to use its voting rights as the largest asset manager in the world to guide companies toward social responsibility. State governments are also displaying a certain sense of responsibility by placing mandates on utility firms with incentives to increase their production of renewable energy.

Inclusive vs. Exclusive

There are two main approaches to socially responsible investing: exclusive and inclusive. Exclusionary investing is the most common, and it simply involves leaving certain companies, sectors, or industries out of a portfolio — examples might include the tobacco industry or certain companies that produce firearms. This type of investing has been around for ages, and we’ve offered it at Personal Capital since our launch in 2011.

While exclusionary investing is certainly a step in the right direction, inclusive investing is a much more robust approach. It is the process of identifying and investing in firms doing a better job managing and promoting social and environmental issues. The newest form of this approach is known as ESG, or environmental, social, and governance. These represent the categories used in the evaluation process. Environmental includes areas such as renewable energy projects and carbon emissions; social includes policies around safe working conditions and employee diversity; and governance covers areas such as executive compensation and board independence.

A global standard for evaluating these metrics has yet to be introduced, but some third-party firms have established comprehensive research and methodologies for ranking. Investors can look to these organizations to validate their investment strategies and help ensure the companies they own are properly managing around ESG metrics.

But socially responsible investing wouldn’t do much good for your long-term retirement goals if it came at the cost of financial gain. The following tips are aimed at helping the socially conscious investor maximize social impact as well as financial gain:

1. Find a strategy that resonates with your values.

After all, this is a value-based approach to investing. Just be careful in the socially responsible filters that you apply. You want to align your investments to your values in a way that doesn't risk your retirement. The narrower the focus, the greater the risk of material performance deviations.

2. Use both inclusive and exclusive filters.

To achieve the greatest impact, consider incorporating both inclusive and exclusive filters into your strategy. In order to do this, you will most likely need a portfolio that includes individual stocks, as you can’t customize an exchange-traded fund or mutual fund. This is still a relatively new industry, so if you do actually use ETFs or mutual funds, be mindful of fees and liquidity.

Investors can use these filters to go much further in their application of socially responsible investing. Rather than just excluding companies they don’t want to own, investors can look for companies doing a good job managing social, governance, and environmental issues.

3. Maintain maximum diversification.

This is one of the most important considerations. As mentioned above, narrowly focusing on a specific socially responsible filter can result in heavy sector skews or category concentrations. These leave you open to greater financial loss when those categories turn south. Instead, choose a well-diversified strategy that at least loosely tracks a broad market index.

Moreover, you should continue to incorporate all of the major liquid asset classes. It’s possible there may not be any socially responsible options in a specific asset class, but that absolutely doesn’t mean you should weaken your portfolio by completely abandoning that asset class. Continue to incorporate both domestic and international equities; domestic and international bonds; alternatives; and cash. Diversification is critical to avoid materially impacting long-term returns.

Socially responsible investing is about recognizing that we’re all small parts of something larger, whether it’s the environment, the human race, or something else we hold dear. Whatever your motivations for joining the movement, you too can cast your vote for social responsibility every time you allocate your investment dollars.

Brendan Erne serves as the director of portfolio implementation at Personal Capital. He joined the firm just before its official launch in 2011, and he’s played a critical role constructing and managing the investment portfolios as well as building out the broader research team. Prior to Personal Capital, Brendan spent several years at Fisher Investments as an equity analyst covering the technology and telecommunications sectors. He also co-authored "Fisher Investments on Technology," published by John Wiley & Sons. Brendan is a CFA charterholder.

Photo: Ford Foundation


The information on this website is for informational purposes only and does not constitute a complete description of our investment services or performance. No part of this site nor the links contained therein is a solicitation or offer to sell securities or investment advisory services, except where applicable in states where we are registered, or where an exemption or exclusion from such registration exists. Third party data is obtained from sources believed to be reliable. However, PCAC cannot guarantee that data's currency, accuracy, timeliness, completeness or fitness for any particular purpose. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

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