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Pointers for socially conscious investing

With impact or socially responsible investing, investors choose

With impact or socially responsible investing, investors choose companies with practices that align with their values. Credit: Getty Images / iStockphoto / noipornpan

People, especially younger investors, are putting their money where their hearts and minds are.

While boomers were among the first to embrace socially responsible investing, a new study from Fidelity Charitable, an independent public charity affiliated with Fidelity Investments, found that more than 70 percent of millennials and gen-Xers have made an "impact investment" compared to 30% of Boomers and older investors.

With impact or socially responsible investing, investors choose companies with practices that align with their values. For example, they may select “green” companies, or decide not to invest in companies that are in businesses like tobacco, alcohol, or guns. A corporation’s environmental, social and corporate governance (ESG) practices come into play.

Socially responsible “investors are looking for strong investment opportunities that further advance society,” says Joseph Hogan, director of financial planning at Mariaca Wealth Management in Lake Worth, Florida.

If you want to get a debate started, bring up whether you should be investing based on your values and whether impact investments can deliver when it comes to returns.

Consider the KLD 400, a sustainable index around since 1990. “It has outperformed the S&P 500 over the last 25 years. Socially responsible funds have less volatility than traditional equity funds.Companies are moved to work towards conserving energy, using renewables and eliminating poor environmental practices,” says Adam Peck, founder and chief executive officer of Riverwater Partners in Milwaukee.

However, cautions Hogan, “I do not recommend investing 100% in SRI. SRI funds are not as diversified as a globally diversified portfolio. They tend to have higher expense ratios than their non-SRI counterparts due to the immense research needed to screen companies.”

Catherine Hardee, assistant professor of law at California Western School of Law in San Diego, has more advice. “Socially conscious investors should spend their time investigating the effort the fund puts into holding boards responsible for meeting their social commitments rather than trying to research the companies themselves. ... There is currently no foolproof way of ensuring that a corporation follows through with its public benefit commitments. A good strategy might be to split investments between SRI funds and high performing stocks, donating some of the profits from the latter to nonprofit organizations with proven track records.”

Jordan Waldrep, senior portfolio manager of Vice Fund for USA Mutuals in Dallas, points out, “SRI is not the only thing to consider. A terrible business that is high in ESG will not be successful as a business or an investment.”

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