Investing at the Intersection of Value and Values

Today, more than ever before, people see the link between their money and their morals – and are seeking to do something about it. They drive their carpool in a hybrid.  They recycle their bottles and their bags.  Their milk is organic, their coffee is fair trade, their beef is grass fed, and their eggs are cage free.  They buy local and American and from companies that treat their workers fairly and act with a conscience. 

But so often they end up asking: Why in the world am I investing in ways that don't live up to those same values?​

That's why funds in so-called “sustainable investment” strategies grew by almost 80% in just two years – from $3.7 trillion in 2012 to $6.6 trillion in 2014.1

Skyrocketing Sustainable Investment

But not all sustainable investments are created equal. They all have the best of intentions, but their approach can be very different when it comes to their financial returns.

That's why it's helpful to understand the difference between these strategies:

Socially Responsible Investing

This type of investing – often known by the acronym “SRI” – is the granddaddy of sustainable investing. It has been in use since the 1960s and still accounts for about 60% of sustainable investment.2

Its general approach can be summed up in the Hippocratic Oath: "Do No Harm." Socially responsible investing focuses on letting you invest without holding your nose by stripping out investments in areas that conflict with your own values including alcohol, tobacco, firearms, gambling, or fossil fuels.

Socially responsible investments have gotten a bad rap at times for underperforming the stock market. The truth is, they often have.3

Socially responsible investments have gotten a bad rap at times for underperforming the stock market. The truth is, they often have.3 An unsophisticated strategy built only on cutting out objectionable industries is not designed to get the best possible results. But, for a long time, these were the only sustainable strategies available to all, leaving most socially conscious investors with little choice but to sacrifice returns in exchange for peace of mind.

Impact Investing

Impact investing moves beyond “don't do bad” to “do good.” The primary goal with impact investing is to make a positive difference in the world.

The primary goal with impact investing is to make a positive difference in the world.

Examples of this approach include green bonds to help communities battle the impact of climate change, microfinance investments offering small loans to help people in poverty, or conservation notes which buy up threatened ecosystems to protect them from destruction.

High Road Investing

In recent years, a new kind of sustainable investing has taken shape. This strategy uses integrated reporting to see the material impact of a company's environmental, social, and governance (ESG) policies on its bottom line. At Aspiration, we call businesses that take proactive steps to do the right – and smart – thing in these areas High Road Companies.

This approach to investing marries value and values. Value investing is most publicly associated with the approach of Warren Buffet. It seeks out investments in companies that are worth more than they are currently valued.

While much of the investing world looks for short-term gains, value investors look at the fundamentals of a business. From this perspective, focusing on environmental, social, and governance questions is not just about feeling good regarding your investment. It is about making investments that might perform better.

It’s not just about feeling good regarding your investment. It is about making investments that might perform better.

A company is not a good long term investment if it does not care for the well-being of its employees or exhausts finite natural resources it needs to operate or risks boycotts, lawsuits, fines, and the public's wrath.

Companies with leadership that understands this and is ready to act on this truth not only avoid risks, but can take advantage of long-term opportunities that more near-sighted management teams cannot see.

That is why studies have shown High Road Businesses outperform similar Low Road Businesses in the stock market and when it comes to profits.4

If investing in High Road Companies lets you do well and do good at the same time, why is it not more common? One reason is that it takes deep and extensive research to look at the internal practices of thousands of companies. But the second reason is that much of the investing world operates not on “make money and make a difference” but on “get mine and get out.”

In 2013, the McKinsey consulting group conducted a study of over 1,000 top corporate executives and board members from around the world. They found that 63 percent of this group reported that the pressure to demonstrate short-term results had gone up over the previous five years. And 79 percent said they were especially pressured to show performance over a timespan of two years or less.5

63%
of top corporate executives felt added pressure to produce short-term results over the previous five years
79%
felt especially pressured to show performance over a timespan of two years or less

That pressure to maximize earnings in the short-term leads to cut corners, stop gap measures, and a lack of investment in workers, innovation, and new ideas. It creates a vicious cycle where companies chase ever decreasing profits and performance.

Investing in High Road Companies can create a virtuous cycle: as these companies do better, they gain more investment, and they then have an incentive to continue doing better, generate better returns, and gain more investment.

There are no guarantees in any investment. But investing in High Road Companies is designed to help you create value in your portfolio all while living up to the values you hold dear.

1) US SIF, Report on Sustainable and Responsible Investing Trends in the United States, 2014.

2) Global Sustainable Investment Alliance, 2014

3) UBS, To Integrate or to Exclude, 2015

4) Eccles, Ioannou, and Serafeim, The Impact of Corporate Sustainability on Organizational Processes and Performance, 2014.

5) Barton and Wiseman, Focusing Capital on the Long Term, 2014

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