While we all want our portfolios to grow and thrive, the question many investors are increasingly grappling with is “at what cost do I chase returns? Is doing well reward enough, or do I also want to make a difference through my investments?” Aligning investments to socially responsible values used to be a simple process – first introduced in the 1920s when The Pioneer Fund began screening out alcohol, tobacco and gambling “sin stocks” from the fund’s portfolio.

Today, however, there are hundreds of values-based funds in the market, each with its own unique approach to proscribing or incenting certain activities and behaviors. Some strive to address environmental issues like global warming by limiting or eliminating investments in fossil fuels. While others approach the same issue from more of an inclusionary perspective by targeting investments in alternative energy providers. Even many traditional equity and bond funds are now employing environmental, social and governance (ESG) screens as one measure of a security’s suitability for inclusion in the fund.

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Gauging your commitment: understanding the trade-offs

Depending on how aggressively you wish to adhere to a socially responsible investing (SRI) mandate, it’s vital to understand that there will be associated risk and return trade-offs. In an ideal world, eliminating investments we deem morally, ethically or socially unacceptable wouldn’t adversely impact our portfolio’s performance or its risk characteristics – but committing to doing “good” by employing a far-reaching SRI strategy might have some impact on your ability to do “well.”

Given the wide array of SRI investment options, deciding on the right fit that aligns with your personal values and determining how much of your portfolio to allocate to these mandates can be a difficult challenge. Many funds with similar names can actually be quite different in composition and strategy once you “look under the hood.”

At B|O|S, we carefully screen and select SRI investments based on a clear understanding of their objectives, strategy and portfolio composition. We also consider their inherent diversification, cost structure, tax efficiency and track record – the same metrics we analyze for conventional funds. And finally, we work with you to genuinely understand the personal values and beliefs that drive your desire to invest responsibly. The following are seven SRI funds in our research coverage that currently meet our broad criteria:

SRI Funds:

  • TIAA-CREF Social Bond Fund selects high-quality bonds that rank in the top half of their peer group in terms of ESG considerations (e.g., financing for affordable housing and clean energy initiatives). It is well-diversified and targets an average maturity akin to the broad U.S. high-quality bond market.
  • PIMCO Low-Duration III Fund is a shorter-term, diversified bond fund with a concentration on socially conscious companies. It takes a macroeconomic top-down and bottom-up individual issue research approach and does not necessarily seek to mimic a particular bond index.
  • DFA US and International Sustainability Core Funds are two broadly-diversified, low-cost offerings with a strong focus on environmental sustainability. Stocks are ranked and selected primarily according to their Greenhouse Gas Emission Intensity. The fund excludes or underweights companies that score poorly on this metric, and overweights value and smaller capitalization stocks, consistent with DFA’s overall approach.
  • TIAA-CREF Social Choice Equity Fund and Vanguard FTSE Social Index Fund are two of the largest and lowest-cost socially responsible equity funds with broad ESG mandates. The TIAA offering applies positive screening criteria and tracks the Russell 3000 index in terms of risk and return characteristics, while the Vanguard fund tracks the FTSE4Good U.S. Select Index and uses negative screening to eliminate companies with subpar records on environmental sustainability, human rights, labor relations, or diversity.
  • S&P 500 ex Fossil Fuels is an exchange traded fund that is similar in composition with the S&P 500 Index, except that it excludes companies that own fossil fuel reserves. For instance, Exxon Mobil, the fourth largest holding of the S&P 500 Index, is excluded from the ex Fossil Fuels fund.

We believe the funds above offer a broad array of SRI options but we continue to assess new and evolving fund offerings to widen our scope. If you prefer a more customized approach, a separate account solution can allow you to build a portfolio of individual stocks or bonds based on customized SRI criteria. Sub-advisors typically require a minimum account size, ranging from $300,000 to $1 million. They also charge annual management fees, separate from any B|O|S fees, which can range from 0.20% to 0.40%.

SRI Separate Accounts:

  • Parametric creates customized, rule-based separate account stock portfolios with more than 30 exclusionary stock screens available – from alcohol and firearms to genetic engineering and pork producers. Individual investor preferences such as risk appetite and tolerance for performance deviation from conventional market benchmarks are also factored into portfolio construction.
  • Breckinridge and SNW are two separate account bond managers that offer sustainable and impact strategies that invest in corporate, municipal, and other government bonds with a high focus on ESG characteristics. Portfolios can also be customized to factor in environmental and religious-based considerations (e.g., “green” bonds issued by government agencies or municipalities to redevelop underutilized sites that often contain low levels of industrial pollution).

These, along with a host of other investment solutions, are available to help better align your investments with your personal values and beliefs. Deciding on an appropriate solution and the optimal means of implementing it, however, requires careful consideration. Socially responsible investing shouldn’t be an all-or-nothing decision. Let us know if you’re interested in exploring the concept further, and we’ll help you navigate the options to find a solution that works.

Filed under: Investing

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