Values-Based Investing: Aligning Your Investment Dollars with Your Core Beliefs

Values-based investing has become a significant trend in the financial world. This approach involves making investment decisions that not only aim for financial gains but also consider social, environmental, and corporate governance factors.

While younger generations tend to be at the forefront of this investment trend, values-based investing is gaining momentum across investors of all ages. This has led to a greater focus on sustainability, ethical practices, and transparency in governance among publicly traded companies.

Indeed, as more investors embrace this approach, there’s a growing opportunity to make a positive impact on society and the world with our investment dollars. Here’s what you need to know if you’re considering values-based investing.

Understanding Values-Based Investing

Values-based investing is an investment approach that combines financial return with social or environmental goals. It involves investing in companies aligned with your values and avoiding those whose practices contradict your ethics.

A values-based approach may encompass various strategies, each with its unique focus and methodology. Socially Responsible Investing (SRI), Environmental, Social, and Governance (ESG) investing, and Impact Investing, for example, are among the most popular ways investors align their money with their beliefs.

Understanding the key characteristics and differences among these strategies is essential:

• Socially Responsible Investing. SRI primarily excludes certain sectors or companies from your investment portfolio based on specific ethical guidelines. Typically, this approach screens out investments in industries such as tobacco, firearms, alcohol, and fossil fuels.
• Environmental, Social, and Governance Investing. ESG or sustainable investing evaluates companies based on their performance in environmental sustainability, social responsibility, and governance practices. It doesn’t necessarily exclude industries but focuses on how companies operate within their sectors.
• Impact Investing. Impact investing aims to generate specific, beneficial social or environmental effects in addition to financial returns. This approach goes beyond avoiding harm and seeks to actively contribute to societal or environmental solutions. Examples might include investing in projects like renewable energy, affordable housing, or healthcare in underserved communities.

Ultimately, values-based investing isn’t just about avoiding harm, but also about seeking opportunities to effect positive change through your investment choices.

Recent Trends in Ethical and Sustainable Investing

The popularity of values-based investing, particularly in ESG investment products, has notably increased over the last decade. According to Morgan Stanley’s Institute for Sustainable Investing, assets under management (AUM) for sustainable equity and fixed-income funds accounted for a record 7.9% of total global AUM in the first half of 2023.

Part of this rapid growth stems from an increasing interest from younger generations in aligning their investments with their core beliefs. A recent survey from U.S. Bank found that 59% of Millennials and 45% of Gen-Xers are interested in investing according to their values, compared to 30% of Baby Boomers.

To accommodate this rise in demand for socially conscious and sustainable investments, asset managers have created a host of new values-based investment products in recent years. Consequently, investors now have ample options for investing in causes they deeply care about.  

4 Reasons to Consider Values-Based Investing

#1: Align Your Investments with Your Values

First, values-based investing allows you to align your investments with your personal values and beliefs. For example, you may choose to invest in companies and funds that reflect your moral and ethical principles. If you value human rights, for instance, you might avoid companies with poor labor practices or those involved in controversial industries.

You can also direct your investments toward companies that have a positive impact on society. This might include firms involved in affordable housing, healthcare, and education, or companies known for their diversity and inclusion practices.

For those concerned about environmental sustainability, you can invest in funds that exclude industries that have a significant environmental impact, such as fossil fuel companies. Alternatively, you can invest in companies that benefit the environment, like those focused on renewable energy.

Of course, these are just a few examples of how you can align your investment choices with your values. As new investment options emerge, you can gradually adjust your portfolio to reflect your beliefs and the impact you hope to make with your investment dollars.

#2: Drive Positive Change

Values-based investing isn’t just about aligning your finances with your moral compass. It can also be a powerful tool for effecting positive change in society and the environment.

By investing in companies that prioritize sustainable and ethical practices, you directly support organizations that contribute positively to society and the environment. This may include companies that invest in renewable energy, practice fair labor policies, or have strong corporate governance.

Furthermore, when investors collectively support socially and environmentally conscious businesses, it sends a strong message to the market. It can encourage other companies to adopt similar practices to attract investment, creating a ripple effect that promotes broader positive change in corporate behavior.

Indeed, this ripple effect is becoming increasingly evident among public companies in the United States. According to a recent Wall Street Journal article, the share of publicly traded U.S. companies disclosing sustainability and ESG data was 63% in 2023, up from 56% in 2022.

#3: Mitigate Unwanted Risks with Values-Based Investing

Values-based investing can also be a helpful approach for assessing the long-term viability of individual companies and industries and reducing portfolio risk. For instance, by focusing on companies with responsible business practices, you can avoid unwanted risks such as regulatory fines, reputational damage, or resource shortages.

In addition, certain values-based investment approaches—for example, ESG investing—can help you identify companies that are better positioned to manage external risks, adapt to changing regulations, and maintain strong relationships with stakeholders. Since global challenges can create considerable risks for the economy and individual businesses alike, companies with strong ESG practices may be more resilient and competitive long-term, potentially making them more attractive investments.

#4: Earn Competitive Financial Returns

The performance of values-based investments, especially those guided by ESG criteria, has been a topic of great interest and study in recent years. A growing body of evidence suggests these investments can indeed perform as well as or even better than traditional investments in certain contexts.

In fact, researchers at NYU’s Center for Sustainable Business conducted a meta-study of more than 1,000 research papers published between 2015 and 2020 examining the relationship between ESG and financial performance. The results revealed that 58% of the research papers on this topic found a positive relationship between ESG and investment performance, whereas only 8% showed a negative relationship. The remaining 34% of the research showed neutral or mixed results.

In other words, an abundance of research suggests that values-based investing doesn’t necessarily preclude you from reaching your financial goals. By choosing investments that align with your personal values and financial objectives, you can earn competitive financial returns while contributing to a more sustainable and equitable world.

Grow Your Wealth and Invest in a Better World with SageMint Wealth

Values-based investing is a dynamic and proactive approach to wealth management that enables you to use your investment dollars not just for personal gain, but as a tool for driving positive change in society and the environment. For socially and environmentally conscious investors, it can be a powerful way to work toward financial freedom while supporting companies that share your values and worldview.

At SageMint Wealth, we’re committed to helping our clients grow wealth while investing in a better world. Our “Live Well, Do Good” philosophy underpins every aspect of the wealth management process, from financial planning and investing to estate and legacy planning. Contact us to begin your financial journey and find out how we can help you align your money with your values and goals.

Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) has certain risks based on the fact that the criteria exclude securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.