Socially responsible investing and “impact investing” are a growing phenomenon among investors. Such investments attempt to balance financial results with “ESG” (environmental, social and governance) considerations. Since 2009, annual flows to ESG funds have grown almost 500% from $1.1 billion flows per year to $5.4 billion flows in 2018.1 At Fragasso Financial Advisors, we recognize the growing demand for ESG investments and seek to educate our clients on how they can incorporate ESG principles into their financial plan.
There are many ways an investor can incorporate ESG considerations into a socially responsible portfolio. Some avoid certain industries such as gambling, tobacco, alcohol and resource extraction; others invest in companies that have positive social impact such as low–income housing, renewable energy or financial services for the underbanked. Some investors even perform a detailed analysis of the company’s culture and its impact on customers, employees and other stakeholders.
It’s important for investors to keep in mind that their unique financial goals are the main priority. Social goals can sacrifice financial performance or conflict with fiduciary responsibilities. That said, some studies have shown that socially responsible investments have comparable, if not better, financial performance when ESG factors are considered.2 Also, some socially responsible investments might receive favorable tax treatment or benefit from government guarantees, potentially boosting returns.
Many of the portfolios at Fragasso Financial Advisors have high concentrations in socially responsible investments as a result of our investment selection process. For example, we believe companies that treat their customers, employees and society well, can minimize a variety of business risks. While none of our portfolios are specifically devoted to ESG investments, we have found that many of our investments are highly ranked in Morningstar’s ESG rating system.3 If you’re interested in learning more about incorporating socially responsible principles within your financial plan, please consult with your financial advisor.
1. Morningstar Direct
2. “ESG and Financial Performance: Aggregated Evidence from More than 2000 Empirical Studies”, Journal of Sustainable Finance & Investment, Volume 5, Issue 4)
3. Morningstar Direct