My first exposure to what is now known as socially responsible or impact investing was as a young stockbroker based in Marin County, an affluent enclave just north of San Francisco. As I listened to a wealthy client looking to align her portfolio with her environmental values, I couldn’t help thinking about the stereotype of Marin County residents as a community of “organically-vogue tree huggers.”
Little did I know that 25 years later, the trend towards socially responsible investing would be very real, extensive and persistent. Today, investors are significantly better educated and informed. In fact, the best-informed people are growing in number and many of them are skilled at creating wealth, as evidenced by the community just south of San Francisco known as Silicon Valley. Many of these well-informed investors are passionate about their values and seek to express those values with how they deploy investment dollars.
At the very top of the wealth spectrum, we see Bill and Melinda Gates encouraging fellow billionaires to join the movement to donate their wealth to solve global health and environmental issues. At the other end of the spectrum, we see large numbers of people with modest incomes donating or loaning to start-ups through crowd-funding for causes in line with their social beliefs.
This trend has not been lost on the investment management industry and to their credit, there are a growing number of quality choices for which wealth managers can now choose in mutual funds, ETFs and separately managed accounts. What was once known simply as SRI funds has expanded to include funds that seek to capture the investment returns associated with superior environmental, social and governance (ESG) or sustainability performance, alternative energy funds, and even religious themed funds.
Remember that your fiduciary responsibility is to your client and their financial health, not the client’s social cause or even planet earth. Even if you share your client’s passion and conviction regarding environmental or socially responsible investing, you will ultimately be held responsible, especially in ERISA accounts, for investment performance related to the client’s financial goals, such as a secure retirement or the funding of a child’s education. Here are three tenants to keep top of mind as you listen to your client talk passionately about their values:
1.Manage risk.Contrary to what some may believe, investing to make a difference and earning investment returns do not need to be mutually exclusive. However, if over the past several years you were invested in an alternative energy fund that was heavily exposed to the solar panel manufacturing business, you paid dearly. Look for funds that are smart about being well diversified and avoid outsized bets on any one sector or company.
2.Invest with a manager that is both experienced and disciplined. Simply applying a negative screen to withdraw companies that “flunk” a certain social or environmental criteria out of the S&P 500 has not been an exceptionally good investment strategy. There are poorly run companies trying to do good things, but that does not mean you have to invest in them. (Think Solyndra, the solar panel company whose highly publicized failure and consequent investigation by federal authorities has flashed across headlines last year). An experienced and knowledgeable portfolio manager can add value in the process of finding companies that are at the intersection of running a profitable business and addressing a larger issue such as global warming or resource depletion.
3.Do not forget that turnover, expenses and taxes still matter.Just because the investment approach or philosophy of the fund may be quite compelling and appealing to the responsible investor, it does not give the manager a “pass” on high underlying expenses of the fund. Again, you are a wealth manager and at the end of the day, you have the duty to work with your client to meet their financial goals. Remember the other ubiquitous trend affecting the business of financial planning – your clients are living longer today than in any other time in history. A newly-minted Silicon Valley millionaire still needs your help in making sure they can enjoy the fruits of their labor in a more just, healthy and sustainable world well into their extended lives.
Wealth managers have more options than ever to evaluate and choose on behalf of their clients interested in responsible investing. Furthermore, as the trend has continued to accelerate, the asset management industry has responded by giving advisors a reason to feel confident offering options with good fundamentals and solid prospects.
Advisors that choose to ignore clients' social and green responsibility concerns do so at their own peril; these clients are savvy, well-informed and predisposed to taking action on their beliefs. The advisor that aligns his or her practice with a client-centric approach will attract and retain more business over time.
Dennis Clark is managing director of Shelton Capital Management in San Francisco. Shelton Capital currently manages over $900 million in mutual funds and separate accounts and has recently launched the Shelton Green Alpha Fund. For more information, please visit www.sheltoncap.com.
For more on socially responsible investing, see Stan Luxenberg’s story “The Upside to Doing Good.”