3 Ways to Build a Socially Responsible Portfolio
Investing with a conscience shouldn't mean sacrificing diversification or an IRA's tax benefits.
By Rebecca Lake, Contributor | Aug. 4, 2017, at 9:24 a.m.
Sustainable investing allows younger investors to stay true to their social values without sacrificing financial returns.
When it comes to investing, millennials want more than just returns. In a Spectrem Group study, 49 percent of millennials with a net worth of $1 million or more said social responsibility was a factor in choosing investments. Fifty-three percent of non-millionaire millennials agreed.
"Millennials are interested in being part of a change toward a sustainable planet, and their investments are an expression of who they are," says Kristin Hull, founder and CEO of Nia Global Solutions in Oakland, California. "They realize they can leverage their investment dollars to invest in a world they want to see."
Socially responsible investing also speaks to this young generation's desire to do good now.
"Historically, investors have had to build wealth over decades before being able to give back through philanthropic donations," says Komson Silapachai, vice president at Sage Advisory in Austin, Texas. Sustainable investing, he says, allows younger investors to stay true to their social values from the start without sacrificing financial returns.
The challenge for millennials is choosing diversified investments that match their values and risk tolerance. The end result should not be "a portfolio with concentrated risks," Silapachai says.
Socially responsible exchange-traded funds, sustainable individual retirement accounts and automated portfolios offer younger investors three different paths for putting their money where their values are.
The Paradox of Millennial Investors
Dismissed as entitled, demanding and obsessed with tech, millennials have plenty of investment needs.
Investing with ETFs. Thanks to their low costs and tax-efficiency, ETFs are popular investing vehicles, with 52 percent of investors planning to invest in ETFs over the next 12 months, according to BlackRock.
Socially responsible ETFs typically include companies that incorporate environmental, social and governance issues into the business. Not all these ETFs are alike, however, and they require careful comparisons before choosing one to invest in.
"The impact of the portfolio, the cost and the risk profile are all important," Hull says, noting that millennials should select funds with a transparent fee schedule.
In addition, younger investors should consider how the companies an ETF invests in plan to address social responsibility and environmental sustainability long term. This isn't just about easing an investor's conscience. Hull says companies intent on finding solutions to social and environmental challenges may be better poised for growth.
Values-minded millennials want businesses with staying power, says Katherine McGinn, a financial advisor with Ameriprise Financial in Rye Brook, New York.
There are three metrics millennial investors should consider when evaluating a socially responsible company: how efficiently it uses natural resources, whether it encourages diversification in its workforce, and the methods used to attract shareholders. All can provide an idea of how well the stock might perform.
Your goals and investing timeline will also shape your ETF choices.
If you're talking about a flexible goal, such as a buying a larger home, you may want a fund that prioritizes your social or environmental objectives, McGinn says. On the other hand, if you're thinking about retirement, "you'll want to balance your social and environmental goals with your financial ones."
That includes managing investment costs. Matt Granski, a financial analyst at Miracle Mile Advisors in Los Angeles, says that socially conscious ETFs can sometimes have higher expenses than traditional index funds because more research is needed to determine which companies are socially responsible.
"These higher research costs can get passed on to investors," Granski says.
Be aware of the total assets under management of a socially responsible ETF, Granski cautions, because "thinly traded ETFs can have larger bid-ask spreads," potentially resulting in more risk.
Fund retirement with sustainable investments. Investing in a sustainable IRA can support socially responsible values, while yielding tax benefits.
Aspiration, a Marina Del Rey, California-based financial services firm, offers traditional IRAs with investments concentrated in sustainable companies. The Aspiration Redwood Fund (ticker: REDWX), for example, which has a sustainable IRA option, invests in companies in the technology, health care and financial sectors. The fund has a 0.5% expense ratio and a $100 minimum initial investment.
Aside from minimal fees and low barriers to entry, the emphasis on social responsibility sets these IRAs apart. Millennials who already have an IRA, however, can still emphasize sustainability by choosing the right investments.