What is Values-Based Investing?

by | Apr 5, 2019

What values do you have that you would never want to violate in order to make a profit? You may have heard investment terms like sustainable investing, ESG, and socially responsible investing (SRI). But, what do they all mean? All are examples of values-based investing, where the investor prefers to only invest in companies that align with their values. By choosing investment strategies that are values-based, an investor can avoid supporting causes that contradict their personal values and beliefs.

This way of investing is certainly not the traditional method. In fact, values-based investing has only become more popular in recent years, although the general philosophy has been around for decades. But, as some statistics suggest, it may just now be catching on.

According to the 2018 biennial Report on U.S. Sustainable, Responsible, and Impact Investing Trends, total U.S.-domiciled assets under management using sustainable investment strategies grew from $8.7 trillion at the start of 2016 to $12 trillion at the start of 2018. This means that one in four dollars of the total U.S. assets under professional management sit in these types of investments. Also, the growth of funds that specialize in environmental, social, and governance (ESG) factors has increased over 200% from the past decade.1

Here are a few examples of filters used in values-based investment strategies:

Environmental/Sustainable Investing

As the name implies, environmental or sustainable investing refers to supporting companies that are good stewards of the environment. This could also mean not supporting companies that have a significantly negative impact on the environment. Key issues when evaluating a company’s sustainability score could include:2,3

  • Materials used, recycling input, and reclaimed products/packaging
  • Safe disposal practices of harmful materials
  • Energy consumption and intensity, and use of renewable energy sources
  • Water consumption and management of water discharge-related impacts
  • Impact on protected habitats and species
  • Emissions of ozone-depleting substances (relating to climate change)
  • Significant spills and transport of hazardous waste
  • Compliance with environmental laws and regulations

For those that are passionate about protecting the environment, they may prefer to only invest in companies that show a shared interest in the issues listed above.

Socially Responsible Investing

Socially Responsible Investing (SRI) involves the screening of companies to align with certain personal values investors may have. For example, screens for SRI investing might exclude companies that profit from activities relating to:

  • Abortion, abortive agents, and contraceptives
  • Stem cell research
  • Tobacco or alcohol
  • Adult entertainment
  • Gambling
  • Child labor
  • Weapons
  • High-conflict areas

In some cases, investors may not know that their investment portfolio contains companies that profit from the above-listed activities and industries. In fact, if an investor utilizes a broad index fund, it’s almost a certainty that there will be companies in that index that would not pass a socially responsible screening.

Corporate Governance

Corporate Governance deals with how a company is run. Governance screens would ideally determine whether the corporate incentives align with the business’s success, highlighting how corporate management and boards relate to different stakeholders. Examples of governance factors might include1:

  • Board diversity
  • Anti-corruption policies
  • Board independence
  • Executive compensation
  • Corporate political contributions

There are a few respected organizations that have pioneered certain sustainability standards and screenings, such as Global Reporting Initiative2 (GRI) and Principles for Responsible Investment4 (PRI). Entities like these are the ones that set forth the standards and screenings that guide the values-based investing world.

Pros and Cons

On one hand, values-based investing could be a great fit for those that have strong beliefs regarding the issues listed above. Certain socially responsible or sustainability funds might provide a way for these individuals to invest in a way that is more fulfilling and consistent with their personal beliefs.

On the other hand, this type of investing can be more expensive and more difficult to access for a typical investor. Mutual fund expense ratios are likely to be higher than comparable funds, given the additional screening and research that goes into this style of investing. And, while you may agree mostly with a fund’s guidelines, it may not fully line up with your values, so you may have to settle for an “it’s better than nothing” approach, as opposed to having a completely custom-built strategy just for you.

Should You be a Values-Based Investor?

Of course, nobody can tell you what your values should be or even what you should do with your money. After all, it is your money. However, this is simply yet another part of building your own financial plan that may deserve some thought or discussion. As with anything, it’s always best to consult with a licensed investment professional, preferably a CERTIFIED FINANCIAL PLANNER™ professional, to determine if a values-based investment approach is one that is right for you.

If you are interested in discussing how you can implement a values-based investment strategy, feel free to reach out to us at CarsonAllaria Wealth Management at 618-288-9505.


1Socially responsible investing: How to Make a Difference; Bankrate. https://www.msn.com/en-us/money/news/socially-responsible-investing-how-to-make-a-difference/ar-BBVzQRI

2 GRI Standards Download Center; Global Reporting Initiative. https://www.globalreporting.org/standards/gri-standards-download-center/?g=5dc3f986-44c4-4c4b-83ce-b40d17c0fa83

3What is ESG Investing; Motley Fool. https://www.fool.com/investing/2019/04/03/what-is-esg-investing.aspx

4Principles for Responsible Investment. https://www.unpri.org/

Additional resources

Global sustainable assets hit $30.7 trillion in 2018. https://www.pionline.com/article/20190401/ONLINE/190409960/global-sustainable-assets-hit-307-trillion-in-2018-8211-report#

US SIF Sustainable and Impact Investing Overview Infographic; The Forum for Sustainable and Responsible Investment. https://www.ussif.org/files/2018%20Infographic%20overview%20(1).pdf

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