The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on Oct. 27, 2017.
Millennials have lived through the longest war in United States history as well as the worst recession since the Great Depression. Coming of age amid such trying times, millennials are motivated differently than other generations. This generation wants to feel like they are a part of something that is making a difference — for the common good, for happiness and for hopefulness — in the world.
So, with a cohort so acutely concerned with how they are impacting the world, how does that influence their advisers and their investment choices?
Financial advisers take many factors into consideration when building a portfolio and financial plan for their client. Some of these constraints are: time horizon, liquidity, risk tolerance, legal and regulatory factors, tax concerns and unique circumstances. Under this last guideline, clients can give their financial adviser parameters for what they feel comfortable investing in or what they don’t.
Socially Responsible Investing (SRI) is essentially an investing strategy that considers environmental, social and corporate governance (ESG) criteria to not only create competitive returns, but also to provide positive societal impact. SRI is something that your clients might inquire about, and financial advisers need to choose appropriate investment vehicles that abide by those guidelines.
The evolution of SRI has been one of organic growth as the landscape of investing and politics has changed. Traditionally, baby boomers and Generation X did not want their financial advisers to invest in companies that deal with tobacco or alcohol or what is commonly known as “sin stocks.” But, with the advancement of technology, SRI has taken the foundation of what sin stocks stood for and expanded it.
The Forum for Sustainable and Responsible Investment is now the leading voice in the advancement of sustainable, responsible and impact investing across all asset classes. Investors not only care what products or services a company provides, but they also care about the environmental and societal impact that they have on the world. Our world today is faced with a new set of problems that wasn’t at the forefront 50 or 60 years ago. Some of these include obesity, poverty and sustainable agriculture. Leading ESG criteria these days include board issues, pollution, human rights, climate change, executive pay and conflict risk.
How to invest
According to the 2016 Report on U.S. Sustainable, Responsible and Impact Investing Trends, “more than one out of every five dollars under professional management in the U.S. — $8.72 trillion or more — was invested according to SRI strategies.” That figure confirms an increase of 33 percent from 2014 to 2016 and accounts for 22 percent of the $40.3 trillion in total assets under professional management in the U.S. tracked by Cerulli Associates.
There are 1,002 funds that incorporate ESG criteria, including mutual funds, exchange-traded funds (ETFs), variable annuities and alternatives. The largest ESG ETF is the iShares MSCI KLD 400 Social. It is comprised mostly of large-cap companies with slightly higher exposure to technology, industrials and real estate and lower exposure to financials and energy compared to the average large-cap ETF. It does tend to track the S&P 500 within a few points.
While growing in popularity, there are still some misconceptions about SRI. It is often assumed that these strategies produce lower returns. However, just because a company complies with these standards doesn’t necessarily mean that the returns will be lower or higher than the broader market or its competitors.
Another misconception is that the criteria used to screen SRI investments is only negative. Yes, there is screening to exclude companies involved in activities that are deemed unacceptable or have a negative impact on the world. However, there is also positive screening for how much investment is being done to solve environmental, community or societal problems.
Finally, many presume that SRI is only involved in public equities. But, it is also utilized in fixed income, real estate and private equity. What is important to note is that for millennials, it’s not always just about a return; it’s also about the impact an investment is making on the world.
Jennifer Pagliara is a financial adviser with CapWealth, LLC, and a proud member of the millennial generation. Her column, which appears every other week in The Tennessean, speaks to her peers and anyone else that wants to get ahead financially.