About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals.
2020 has been a year of stress and uncertainty - but it’s also been a year that’s brought to light issues of social justice, climate change and social responsibility. As consumers, we’ve grown more conscious about what we eat, where we buy from and, of course, who we vote for. But as investors, our awareness has gradually been increasing as well.
More and more investors are opting to align their portfolio with their greater social beliefs and ideals. In fact, between 2016 and 2018 alone, assets being placed in socially responsible investments rose 38 percent. Of the $46.6 trillion of assets under management, one in four dollars was in SRI assets.1
What Is Socially Responsible Investing?
SRI utilizes a strategy in which one seeks to invest in companies that are both ethically aligned with the investor and able to generate financial returns. Just as one seeks out companies that are working to make a positive social or environmental impact, the selection process could also include identifying companies that may not be a good match - such as those that produce fossil fuels, manufacture guns, utilize underpaid laborers, etc.
It’s important to note that the selection process for SRI assets will be fairly personal to you and your priorities. You may be focused on climate change and finding environmentally sustainable companies, while others may be more focused on supporting businesses owned by women or persons of color. Aside from the “typical” investment metrics like past performance and cost, SRI requires additional screening done by you or your investment broker.
While “SRI” stands for socially responsible investing, it can also be used to abbreviate “sustainable, responsible and impact” investing.
SRI vs. ESG vs. Impact Investments
In the realm of SRI, you’ve likely heard other terms like ESG and impact investments.
What Is ESG?
ESG stands for environmental, social and governance investing. ESG investing falls under the broader umbrella of sustainable investing, and some consider it to fall under the umbrella of SRI as well.
In addition to more traditional metrics used to measure and select investments, ESG metrics feature non-financial indicators which include “sustainable, ethical and corporate governance issues such as managing a company’s carbon footprint and ensuring there are systems in place to ensure accountability.”2
While 2020 has been a rollercoaster year for everyone, ESG-themed ETFs have actually grown immensely in recent months. In 2020 alone, ESG-themed ETFs have brought in $38 billion in new investments, reaching a landmark $100 billion in total assets for the first time.3
What Is Impact Investing?
While ESG refers more to the vetting process and labeling of investments, impact investing refers to the more tangible, measurable aspect of investments. Impact investing is seen more commonly in private markets, whereas SRI and ESG investing is shown more broadly in publicly traded vehicles.
Impact investing is done with the goal of creating measurable change - x units of carbon emission reduced, positive economic change in low-income neighborhoods, x schools built in a third-world country, etc.
Where you choose to spend your money - from day-to-day purchases to long-term investments - can be one of the greatest impacts you’ll make in your lifetime. If you’re considering diversifying your current portfolio with more socially responsible investments, it’s possible to do so without sacrificing your chance at gaining financial returns. Work with your financial advisor to determine what companies may be well-aligned with your beliefs as you strive to address important social and environmental issues one dollar at a time.
Dream Financial Planning Process ™
Whether you're managing student loan debt, starting a business, or considering buying your first home, the DREAM Financial Planning Process™ is tailored to the unique needs of busy professionals is their 30s and 40s. This process focuses more on short-term goals while you grow and evolve in your personal and professional life. If you're looking for guidance on: Financial Planning, optimizing employee benefits, budgeting, student loans, and managing your 401k or investments we can help.
With uncertainty surrounding the economic stability of our country, it's okay to have fears and anxieties surrounding your own savings and investments. The most productive course of action from here is to reach out to Dream Financial Planning (or whoever your trusted advisor might be) and discuss your options. It's easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head. If you'd like a Complimentary Review and risk assessment of your investment portfolio feel free to send me an e-mail.
On the first Thursday of every month I send out a monthly newsletter with tips and tricks to help you manage your Finances. In the October Newsletter, I discuss how the stock market doesn't historically care who's in the White House. I also share a Fox Business Network article, where I'm quoted, about paying down debt or investing.
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Disclaimer: Dream Financial Planning, LLC does not warrant that this information will be free from error. None of the information provided on this website is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall Dream Financial Planning, LLC be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials in this site, even if Dream Financial Planning, LLC or a Dream Financial Planning, LLC authorized representative has been advised of the possibility of such damages. Please consult with your own advisor before making any changes to your Financial Plan, Investments, or Insurance coverage.