Worried about climate change? Dismayed about gun violence? Concerned about the effects of opioids on individuals and communities? It’s not new for investors to think about how these issues connect with their investment portfolios. But the variety of tools and options to help make these connections is growing every day. That’s great news for investors who think about these issues—but it can make it hard to know where to start.
We’ve found that when it comes to responsible investing, a simple checklist can do wonders. It can help investors move beyond intent to action and finally find the right stock or bond portfolio. Our checklist recognizes that sometimes investors just want to own good companies and avoid bad ones, by their own definition. Sometimes investors want bad companies to become better, which requires owning them. And sometimes a stock or bond portfolio just isn’t the right tool for the problem.
What is responsible investing?
Before we talk checklists, let’s talk acronyms and definitions—two other things that can stymie investors. The short story is not to worry about special terminology; an asset manager should always be able to explain it in plain English. But in case an investor finds themselves facing down a wall of acronyms, here are a few tips.
The United Nations Principles for Responsible Investment (UNPRI) define responsible investing as solely focused on financial performance. Environmental, social, and governance (ESG) are the three broad categories used to classify the issues that responsible investors might think about. UNPRI distinguishes this approach from those with moral or ethical purposes, which have been typically associated with socially responsible investing, or SRI. That’s not to say that SRI investors don’t care about financial performance, of course, or that ESG investors are blind to morals and ethics. But those are the typical dividing lines.
Investors might also have heard the term impact investing. This usually refers to investments made with the intention of generating measurable social or environmental benefits in addition to financial return. That may sound straightforward enough. However, an important concept in impact investing has been that of additionality: the idea that the benefit would not have occurred absent the investment. Although it has become popular to use the term impact investing expansively, investors may want to be aware that many still use the term in its more technical sense and reserve it for private investments in which it’s easier to prove additionality.
We try not to get too hung up on vocabulary; we’re happy to work with investors using whichever terminology they prefer. But these pointers have often helped new investors who crave context. With that cleared up, let’s talk about a responsible investing checklist.