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Updated on Wednesday, January 16, 2019
Whether it’s an IRA, a 401(k) or a plain old brokerage account, investing is one of the quickest and most effective ways to make your money grow. Compound interest can help you reach a variety of long-term financial goals, from homeownership to retirement.
But when you’re investing in the stock market, you’re not just helping your own nest egg grow. You’re also backing businesses. In an effort to put their cash toward causes they actually believe in, many investors are becoming more discerning when allocating their assets, taking on a values-based investing strategy. Such investors are unwilling to compromise their personal values just to boost their capital gains.
So what exactly is values-based investing, and can it help you do well while doing good? Here’s what you need to know about how socially responsible investing can help you change the world while putting extra change in your pocket.
What is values-based investing?
Also known as “socially responsible investment strategies” (SRIs) or “impact investments,” values-based investing is about aligning your investment strategy with your personal ethics. Investors do this by allocating assets to companies and firms that support and enact causes they believe in, such as a commitment to environmental sustainability or liberal social values.
Many investors still believe that values-based investing involves a financial trade-off — though many performance indicators seem to suggest otherwise. More than half of investors think prioritizing values over strict performance metrics could lead to fewer financial gains, according to a 2015 survey by Morgan Stanley.
Despite that perception, the interest in values-based investing is growing. In that same survey, 75% of individual investors said they were interested in the strategy, while 86% of millennials were.
Along with making you feel better about the companies your money is supporting, there’s an argument to be made that values-based investing is a better decision from a financial standpoint too. After all, when businesses experience values-based scandals, their stock prices often drop dramatically — which is exactly what happened as a result of Volkswagen’s emissions cheating debacle back in 2015.
Common strategies to invest based on your values
So which values are we talking about? What are the metrics these investors use to screen potential securities?
Here are a few of the most common rubrics investors use to make their decisions.
Environmental, social and governance (ESG) criteria
A company’s environmental impact, social implications and governance ethics are three primary criteria by which a potential investment can be judged. How well is a given company performing as a steward of nature and ambassador for environmental sustainability? Does it support human rights and make an effort to participate in the community? How is the company run, and what are its policies toward employees and leadership structures? All of these are questions a values-based investor will ask before deciding to invest in a company’s shares.
Utilizing ESG criteria as a yardstick for potential investments gives you a good overall look at a company’s behavior. But some socially responsible investors narrow in on a more specific focus.
Socially responsible investing (SRI)
In many cases, investors are specifically interested in how a company behaves on a human and social level, both within the firm itself and within the community at large. These investors might choose stocks based on their political affiliations or policy leanings, with special attention on the following types of concerns:
- Family values or religious beliefs: Does the company support the investor’s religious values or stance on marriage rights?
- Labor rights: Does the company treat its employees fairly, pay a living wage, and create healthy and diverse power structures internally?
- Diversity and civil liberties: Does the company support civil liberties and equal rights for all?
Other values-based investing metrics
Of course, the personal values investors use to judge companies are as diverse as, well, personal values. Other major ethical questions for socially conscious investors may involve environmental stewardship, animal welfare, child labor, reduction of toxic admissions and much, much more. It’s all up to what matters to you!
How to start values-based investing
Interested in doing some socially responsible investing of your own? With the vast array of stock options out there, it can be difficult to know where to start.
If you’re just diving into the wide world of investing, check out our guide on how to get started. It’ll help you learn more about the risks and rewards of putting your money in the market and also walk you through the steps of opening a brokerage account, which you’ll need in order to choose specific stock options.
Once you’ve opened and funded your account, you can begin researching potential investments to see how they stand up to the values outlined above — or any that match your own personal philosophies. If it’s a major company, simply Googling its name likely will result in a wide variety of news headlines to give you a sense of the firm’s corporate, social and environmental behaviors and positions. It’s also a good idea to look into the stock’s historical performance. (You’re still in this to make money, after all.)
If you don’t have a lot of cash to play with, another option is to consider micro-investing through a robo-advisor app like Stash. Although there are a variety of such apps to choose from, Stash in particular offers a host of ETFs that are specifically curated based on their values.
Values-based investing is a way to ensure that the money you put on the stock market works to improve both your personal net worth and the world at large — in whichever ways you personally define “improvement.” Backing socially and environmentally conscious companies might even safeguard your investments against the pitfalls that plague companies that cut corners.
Whether you decide a socially responsible investment strategy is right for you or not, one thing’s for sure: If you want to save for retirement and other major financial goals, there are few more powerful methods than investing.