Before you get started, check out A workbook for the values-driven investor: ESG and responsible investing. This workbook was produced by RBC Wealth Management as a resource to help investors align their portfolios with their personal values. It can help you determine your ESG investing path, providing you with a foundation for when you meet with your financial advisor for your annual investments review. You can also use the workbook to help your family have a conversation about defining the family legacy intentions.
As you meet with your financial advisor, consider these three questions to discuss:
1. How can I align my current investment portfolio with my values?
Your values and goals are unique to you. You’ll want to sit down and discuss these with your financial advisor before you start putting your values into practice. There are a couple of different ways to approach this. One is through a negative screen where you identify companies that don’t align with your values and remove them from your portfolio. Another is a positive screen, where you actively invest in companies that align with your goals and values.
The most popular way to reflect your values in an investment portfolio is to identify the right sustainable or ESG funds for you. A fund can reduce the need to analyze individual stocks and spread out risk by holding a large basket of equities. Funds that integrate ESG into their decision-making process allow you to hold a diversified portfolio of companies that have more attractive environmental or social practices than their peers.
2. How can my new ESG-focused portfolio meet both my values-based goals and my investing goals?
The growth of ESG investing opportunities in the last few years makes it easier than ever for investors to blend their values into their investing goals. ESG investing is all about recognizing the real risks that are present in your portfolio and making a personal judgment about whether you’re comfortable with those risks or not for both supporting your values, and supporting your financial goals.
Beyond that, there is growing evidence that you do not have to sacrifice returns in order to integrate your ESG into your portfolio. One study conducted by a large asset manager studied the returns of 11,000 funds between 2004 and 2018. They segmented the returns of ESG funds and traditional funds and compared the results. They found that ESG funds performed at least as well as traditional funds and offered 20% less downside risk than their traditional peers.
3. How can I measure the success of my ESG investing goals?
One answer to this question you’ll discuss with your financial advisor would be identical to how you measure the success of your investing goals. Together, you can set up portfolio performance desires and expectations.
ESG investing has shown to not hamper investing returns. In a recent report, research firm Morningstar explains, “Sustainable funds outperformed their conventional fund peers in 2020,” with three- and five-year results looking similarly powerful. The report also showed this past year, three-quarters of sustainable funds finished in the top half of their categories.
ESG investing, however, does take a third-dimension approach to measuring investments. You’ll want to discuss with your financial advisor how you measure the impact your investments are making to support your values.
As you meet with your financial advisor and discuss incorporating ESG into your portfolio, just know that whatever investment route you choose, you’re essentially authoring the “story” of your own portfolio, which can lead to a positive impact for both you and the planet.