1 What is SRI?

Sustainable, Responsible, Impact Investments (SRI) provide you with the chance to vote with your investments and influence our world. SRI is a rapidly growing area of investment. It is outpacing the overall rate of general investment growth.

SRI allows individual investors the ability to have investments in line with their values. It provides another tool to address important issues. SRI provides a way to support technologies and issues while earning a competitive return.  As an example, if someone is concerned about global warming or campaign finance reform, SRI is a strategy to address these issues.

There are different degrees of SRI involvement.  SRI can be as simple as using a member-owned credit union instead of publicly traded banks driven by profit motivation. It can involve investing in Calvert Community Investment Notes that support international micro-credit and provide semi-annual interest payments and returns the investment at maturity.  SRI can involve investing part of the US stock portfolio in a low-cost SRI index fund (0.28% expense ratio) that provides SRI screening.  It can include purchasing an SRI mutual fund that is active in screening, shareholder advocacy, and community investing.

2 Other names for SRI and how to invest.

SRI is an investment strategy that seeks to maximize both financial return and social good.  It is a way to use our financial system to positively impact society.  SRI allows people the ability to incorporate their values in their investment decisions

You may also hear SRI referred to as:

• Sustainable, Responsible, Impact Investing
• Socially Responsible Investing
• ESG Investing – Environmental, Social & Governance
• Sustainable Investing
• Ethical Investing
• Green Investing
• Double-Bottom Line Investing
• Triple-Bottom Line Investing
• Socially Conscious Investing
• Mission Investing
• Values Investing
• Responsible Investing
• Impact Investing

SRI is not the same for everyone.  Values and priorities can vary greatly.

There are many ways to develop an SRI portfolio by using:

• Individual stocks
• SRI mutual funds
• SRI exchange-traded funds (ETFs)
• Community development loan fund
• Managed accounts (from asset management firms)
• Alternative investments

3 Growth of SRI

SRI has taken off over the past 20 years and is becoming mainstream. The amount of assets that are managed in the US that use ESG (Environment, Social, Governance) criteria in their analysis has increased to about $17 trillion.  Thirty-three percent of all managed investments in the US use an ESG strategy. That is 42% in the last two years, it is growing more rapidly than general investments.

Some of the main reasons why SRI is more attractive include:

• There is more availability.  There are more than 1,000 SRI funds available in the US.
• SRI mutual fund and ETF (Exchange Traded Fund) performance has improved.  Because of the increased competition and the increased size of these funds, administrative costs are lower.
• SRI performance in many cases has outperformed standard indexes because many avoid fossil fuel companies that have underperformed in the market over the past few years.
• There are companies and industries people do or do not want to support and there is more information readily available than ever before.
• There is more awareness around climate change and its impact, and many people want to divest from fossil fuel-related companies.
• There is more awareness that people can make an impact with their investments on issues of corporate political activity, climate change, equal employment opportunities, board diversity, sustainable agriculture, executive compensation, conflict risk,

4 Degrees of SRI

There is not one type of SRI portfolio. For advisors, this is a conversation to have with clients.  This is a chance to find out about their values and priorities.  For investors, it’s helpful to know where your priorities are and what trade-offs you are willing to accept.

There are four types of investors.  There are investors between these categories but, in general, they fall into these types.

1 – Investors not interested in SRI, want a diversified portfolio using very low-expense ETFs or index funds. They want a diversified portfolio with broad exposure at the lowest possible cost.

2 – Investors who want everything SRI and a well-diversified portfolio.  They do not want exposure to any non-SRI holdings.  Some investors do not want any ownership in any company that is not in line with their values, even if the intent of the fund is to make changes in the company.

3 – Investors are interested in the idea of SRI and want some exposure, but they do not want to sacrifice performance. They do not want funds with significantly higher expenses, mostly they are interested in SRI funds in the large US equity space and maybe a small amount in community investment notes.  They are fine with ETFs for other asset classes.  This is referred to as semi-SRI.

4 – Investors are concerned about a specific issue, such as climate change, helping developing economies, alternative energy, organic farming, or a religious issue. They may fall in Category 1, 2, or 3 above but want to be sure to have some exposure (and/or lack of exposure) around a particular issue.

5 Motivation for SRI

Avoiding Undesirable Companies

Some people and organizations are not comfortable investing in and supporting some companies. Here are a few companies that are part of the S&P 500, which you may want to challenge and change:

-Exxon Mobil
-Chevron Corp
-Bank of America
-Coca-Cola
-Philip Morris Intl
-Pepsico
-Wal-Mart
-McDonald’s
-Conoco Phillips
-Occidental Petroleum
-Goldman Sachs
-Monsanto
-Dow Chemical
-General Dynamics

Political Tool

Most of the clients I work with are not content with the influence of corporations in our political system and are concerned about:

• the environment (climate change),
• corporate political spending
• executive compensation (and the disparity between worker and executive compensation)
• military weapons (avoidance)

Many investors are frustrated about the inaction of our government on many issues.  SRI can influence corporations on a broad range of issues that our government is not addressing.

Specific Issues

There are many people who are very concerned about a particular issue and are not comfortable with investments that do not support their issue.  With SRI, people can vote with their investments.

Many religious groups (including the Unitarian Universalists, Catholics, and Presbyterians) are avoiding corporations that are not in line with their values and supporting industries that are.

There is currently a Sudan divestment campaign that is like the South African apartheid campaign of the 70s and 80s.  These divestments played an important role in weakening the oppressive South African government.

Many investors do not want ownership of Monsanto, which is part of the S&P 500 and part of many index funds.  One issue is with their GMOs (genetically modified organisms).  People would like to see labeling, independent safety studies, and protection from cross-contamination.

Climate change is one of the biggest issues of our time.  There are groups, such as www.350.org, that are calling for divestment in corporations involved with fossil fuels.  Numerous university funds have joined the campaign. SRI mutual funds and ETFs make having a diversified portfolio that is fossil fuel free relatively easy.

For many, divestment in fossil fuels is not only a step towards combating climate change, but it may also very well be a good financial move.  There may be a carbon bubble.

6 Three Major Components of SRI

There are three major approaches to SRI and several ways to get involved.

Screening – using positive and negative filters to select investments (avoid or include investments).  Positive and/or negative screening can be accomplished using:

Individual Stocks –create a portfolio out of individual stocks and bonds or use a money manager who focuses on SRI that will set up a separate account and manage your investments.  There is no expense ratio to pay with individual stocks but there are transaction fees.

SRI Mutual Funds – use SRI mutual funds that share similar values to screen their holdings.

SRI ETFs (Exchange Traded Funds) – you can use SRI ETFs for part or all of your portfolio.

Shareholder Advocacy – shareholding involvement (as an individual, through a mutual fund, or foundation).  Voting proxies for shareholder resolutions or choosing mutual funds that vote in line with your values.

Individual Stocks – You and/or your advisor can vote for your proxies.

SRI Mutual Funds – many SRI mutual funds vote proxies and engage in corporate engagement (shareholder resolutions, letters, and corporate engagement).

The following are some major shareholder initiatives during the past few years.

• Corporate Political Activity
• Climate Change / Carbon Emissions
• Labor and Equal Employment Opportunities
• Executive Pay
• Independent Board Chair & Board Diversity
• Human Rights

Community Investing – providing money for people who otherwise would not have access to help close the wealth disparity.  This can be as simple as using a credit union that is member-owned instead of a shareholder-owned bank that is driven by profit.

Community Investment Notes – Calvert notes can be held in a brokerage account.

CDFI Credit Unions – as simple as using a member-owned credit union instead of a shareholder-owned, profit-driven bank for savings, checking, debit, and ATM cards.

SRI Mutual Funds – some SRI mutual funds have some community investment holdings.

7 Evaluating Investment

No Load and I Class Funds

Mutual Fund vs ETF

An exchange-traded fund (ETF) is a basket of securities created to track as closely possible a particular market index, such as the Standard & Poor’s 500 Index or the Dow Jones Industrial Average.  They are similar to mutual funds in that they represent investments in the same types of securities, but they generally have lower fees and can be bought and sold with more pricing immediacy than mutual funds.  They have some tax advantages over a fund that buys and sells often and generates capital gains for their investors.

Mutual funds trade at the end of each day.  ETFs trade like stocks, during the trading day.  That is not that important to long-term investors who buy and hold.  ETFs generally have lower expense ratios because they are not being actively managed.

ETFs must, however, be bought and sold through brokers, and those trades may involve transaction costs.  ETFs may prove to be more expensive than mutual funds to investors who add money each month to their portfolio.

Expense Ratio

There is an operating cost for mutual funds and ETFs.  It is the cost of an investment company to operate a mutual fund.  It includes the manager’s fees, administrative costs, compliance, trading costs, 12b-1 fees paid to brokers, and advertising. The expense ratio is a percentage that directly lowers the return to a fund’s investors.  If a fund’s assets grew 10% during a particular year and the expense ratio is 1%, the investor would receive a 9% return on their investment.  If the fund lost 5% during a year and had a 1% expense, the investor would lose 6%.

The expense ratio is a very critical number when comparing investments.  Over years a percentage or even a fraction of a percent can add up and make a big difference.  In general, small-cap funds and international funds have higher expense ratios than large US stock funds.

Performance and Ratings

8   Steps to SRI

Liquidity Needs

A prudent reserve of about 3-6 months of living expenses is recommended.   It should be invested in very short-term non-volatile holdings such as a money market or a short-term bond fund.  The idea is to have money available if something were to happen so you would not need to use high-interest credit cards.  For example, if you were in an accident and needed to cover expenses without income for a while or if you need major home repair, the prudent reserve is there to cover deductibles and other needs.  For some people with adequate insurance and low deductibles, this can be on the lower end of the range.  For many self-employed people without significant insurance, it may be advisable to exceed the recommended range.  So I review a client’s insurance coverage, make recommendations and help them determine how much reserve they need and where it should be held.

You should understand your long-term spending plan (even a rough idea).  A different investment model (or balance of assets) for each period that investments will be used.  For funds that are needed within the next two years, a very conservative portfolio may be recommended.  For investments needed between two and five years, a moderate portfolio may be used.  More aggressive portfolios may be used for investments not needed for more than five years.

Risk Tolerance

It is important to know how much volatility you can handle.  What you do not want to happen is that when the market goes down (which it inevitably will) you get nervous and sell your holdings at a low point and when the market is high, you get excited and buy into an inflated market.

A study was conducted (DALBAR) that calculated what the average investor actually earned over the past 20 years.  If the average investor started with $100,000 in an investment account 20 years ago and earned what the S&P 500 earned (7.8%), the account value would have been $1,043,427 (this assumes no taxes or fees). The average investor earned only 3.5 %/year over that time period or $479,744 in total (no taxes or fees).  One problematic tendency of the average investor is that they tend to buy high and sell low.

Diversification

Diversification is not a tool to boost performance rather it is used to reduce risk. By picking a variety of groups of investments, you can limit your losses and reduce the fluctuations of investment returns without sacrificing too much in potential gain.

Diversification looks at picking asset classes that are not perfectly correlated.  Correlation is a measure of how much the returns of two investments move together, up or down. When you put assets that have low correlations together in a portfolio, you may be able to get more return while taking on the same level of risk, or the same returns with less risk.

A diversified portfolio should be diversified between asset classes and within asset classes. Another important aspect of building a well-diversified portfolio is that you try to stay diversified within each type of investment.  For example, within US stocks, to be diversified you should have a stock of companies that have different sizes and represent a variety of industries.

9 Examples of Mutual Fund-ETF Investments

SRI mutual funds and ETFs are not customized for each investor.  There is some general screening for most of the SRI funds.  Generally, they avoid companies involved in alcohol, tobacco, gambling, weapons, fossil fuel production, and/or the military.  You may not have any objection to some of these businesses (alcohol for example) but most of the SRI funds will exclude alcohol.

In general, the expense ratio of an SRI fund is higher than that of a non-SRI fund.  There is additional screening that is an expense.  These funds compared to large index funds do not have the scale to spread out the expenses to keep them down.  SRI funds that are involved with shareholder advocacy incur additional expenses that index funds do not have.

One area where SRI funds are generally underexposed compared to a broad index is businesses working with fossil fuels.  When fossil fuel companies are doing poorly, SRI funds tend to outperform a broad index.  When fossil fuel prices are higher and those companies are doing well, SRI funds may underperform.

10 VOTE

Engine No1’s ETF with the ticker VOTE has a different strategy than most SRI funds. They do not screen their holdings, have a low expense ratio, and engage heavily with companies.

The three SRI strategies are screening, shareholder advocacy, and community investing.

VOTE follows the S&P 500 without any screening. They hold fossil fuel companies in their portfolio, which is unusual.

They engage with companies primarily on environmental issues. They engage with companies in many industries including energy, transportation, and agriculture.

• They got three environmentalists elected to the Exxon Mobile board of directors.
• They engaged with Tyson Foods about plastic packaging.
• They requested that the Walgreens board issue a report on external public health costs created by the sale of tobacco products.
• Worked with Costco to adopt science-based greenhouse gas emissions reduction targets, inclusive of emissions from its full value chain.
• Holding the Board accountable for deforestation at Procter & Gamble.
• Advancing diversity, equity, and inclusion at Tesla.
• Ensuring greater lobbying oversight and disclosure at FedEx.

11 Separately Managed Accounts

Separately Managed Accounts (SMA) are individual, joint, trust brokerage, Roth IRA, and/or IRA accounts that are generally composed of individual stocks and bonds.  Hence, there is generally no expenses from the holdings (such as an expense ratio for mutual funds).  The accounts may be set up at Schwab, Folio, or another brokerage house.  The managing firm uses one or more models to determine holdings.  They can be customized, down to each individual stock, for each client.  The SRI account managers engage in shareholder advocacy.

Five companies that specialize in this are:

First Affirmative: First Affirmative provides an option that has significantly lower minimums and expenses than the alternatives. $5k account minimums through a First Affirmative fee-only financial advisor.  They charge 0.36% of the assets they manage per year (the fee is lower with more assets).  There are no transaction fees for trades.  First Affirmative is very active with shareholder advocacy. Fee-Only financial advisors associated with First Affirmative provide comprehensive financial planning services for an additional fee. Services include retirement planning, tax planning, insurance review, and estate planning. AIO Financial is a member of First Affirmative.

OpenInvest: OpenInvest provides separately managed accounts for financial advisors. They provide impact reporting. As with AffirmativESG, investors need to work through a financial advisor to access this option. AIO Financial can provide access to OpenInvest.

Trillium: $1 million account minimums ($250k minimum and 0.6% fee, if you work through a financial advisor).  They charge 1% of the assets they manage per year (the fee is lower with more assets).  The accounts are customized to each individual’s needs.

Boston Commons: $2 million account minimum.  They charge 1% of the assets they manage per year (the fee is lower with more assets).  The accounts are customized to each individual’s needs.  They have the option of investing in a pooled fund, which is not customized.  The minimum account balances are lower, but they start at $2 million.  The fees for the pooled fund start at about 1% and go down as you invest more.

Boston Trust: $3 million account minimum. They charge 1% of the assets they manage per year (the fee is lower with more assets).

Advisor Partners: $500k account minimum through a financial planner. They charge 0.3% of the assets they manage per year plus your advisor’s fees (the fee is lower with more assets).  They outsource shareholder advocacy. Accounts are held at Schwab and there are transaction fees for buys and sales – $4.95 per trade (which is passed onto the investor).

12 Example Portfolios

The appropriateness of a portfolio depends on several factors including risk tolerance, liquidity needs, and volatility.

There are many ways to construct a diversified portfolio. You can use combinations of mutual funds, ETFs, individual stocks, individual bonds, alternative investments, and/or CDs.

A diversified SRI portfolio can be constructed completely out of SRI mutual funds and/or SRI ETFs. You can use a portion of SRI funds and a portion that is not SRI.

If an investor is not interested in SRI, the best investment strategy may be to construct their portfolio out of index ETFs (Exchange Traded Funds) with very low expense ratios.

For SRI and non-SRI portfolios, we recommend having broad exposure over many asset classes and rebalancing the accounts regularly (such as once every 3 to 6 months).  If SRIs are not desired, there is no advantage to incurring additional expenses to invest in a managed mutual fund that, over time, will underperform the index.

Once an investment policy (or portfolio distribution) is defined, you can use SRI or non-SRI investments for each asset class.

13 Investing Mechanics

Where to Invest

To begin, if you do not have a brokerage account open an account at a place such as Charles Schwab, Vanguard, or Fidelity.

Consider the transaction fees for the types of investments you will be using. We use Schwab because they have no transaction fee for the investment we use, and they offer a wide variety of options (unlike Vanguard).

There are SRI management companies that will manage your funds in a separate account.  The companies engage in shareholder advocacy on your behalf.  The disadvantage is generally the high minimum amounts that are needed.

Consideration if looking for an Advisor

If you feel like you need support, there is no shortage of financial advisors.  One of the most important things to know is how they are being compensated.  Unfortunately, financial investment firms are often very unclear about the cost of their services and investment products. This lack of transparency and concealing of fees is an unfortunate reality.

There are many ways investment firms get compensated. They may receive sales loads, surrender fees, management, and administrative fees, 12b-1 fees, transaction fees, redemption fees, brokerage fees, inactivity fees, transfer fees, market impact costs, and more. These fees directly reduce the return on your investments – they are costing the investor money.  Many financial professionals are being compensated for selling products, such as annuities and life insurance, which may not be appropriate for their clients.

One way to avoid this conflict of interest is to work with a fiduciary Fee-Only advisor.  A fiduciary keeps their client’s best interests first as opposed to most financial salespeople who receive commissions and are benefited by selling certain products.  Fiduciaries are not compensated by selling products or earning money on commissions.

Fee-Advisors work in a few different ways, including hourly, assets under management (pay a percentage, usually about 1% per year of the assets being managed), and lump sum (depending on the complexity of your situation).  If you just need a checkup and some occasional guidance, consider an hourly or short-term lump sum arrangement.

The National Association of Personal Financial Advisors (NAPFA) is a national organization for Fee-Only financial advisors.  There is a directory of advisors on their website.

Another designation to look for is a CFP (Certified Financial Planner).  In addition to investing, a CFP can help you with retirement projections, tax planning, insurance review, estate planning, and education planning.  Depending on your situation, this may be important.

AIO Financial is a fee-only financial planning firm, a member of NAPFA and their financial advisors have CFP designations.

Account Maintenance – Rebalancing

I recommend rebalancing your account at least every six months.  By rebalancing, I mean getting it back into the distribution of your target Asset Allocation.  What this means is that you will be selling the investments that have done well during that period and buying investments that have not done as well.  This forces you to buy low and sell high and improve the overall performance of your portfolio.  It also keeps you from getting overexposed in any one area.

18 YourStake

YourStake is an impact investment evaluator. YourStake allows advisors to evaluate the impact of portfolios and compare them. It is user-friendly and provides graphics that are easy for clients to understand. They show the exposure of a portfolio in different ESG areas, and they show examples of shareholder advocacy for the funds that are held in the portfolio. You can dig several layers into the data if there is a particular issue of the company you want to investigate.

One display option is a metaphor where they show the impact in very clear terms that your portfolio will have over time. Such as the number of cows saved, the number of women running meetings, guns off the street, plastic out of the ocean, solar panels in use, etc.

They also provide a petition platform to help make an impact. Advisors can create or sign petitions with the backing of the assets they manage. These petitions can be used to make real changes in companies.

For most advisors, the cost is $999 or $2,999 per year. There is a more expensive option for using their program to develop portfolios ($9,999/year). There is a significant discount for First Affirmative members. They make updates regularly and are open to recommendations.

19 First Affirmative – AffirmativESG

First Affirmative is a network of fee-only financial advisors who specialize in SRI. They provide the AffirmativESG platform to their advisors that offers customized accounts. They have a questionnaire on their website that advisors can fill out with their clients, and it produces a portfolio of about 350 individual stocks. The graphics and the process are very impressive for clients.

First Affirmative holds assets at Folio Investing. Advisors set up accounts through First Affirmative. All activity is done through First Affirmative.  They are very active with shareholder advocacy. Holly Testa oversees advocacy, and she does a great job.

You need to have $1M managed in by First Affirmative to become a member, be listed in their directory, have access to their forum, and get a discount on certain software. They charge 0.4% of the assets you have with them on the AffirmativESG platform.

20 Ethos

Ethos is a platform to evaluate portfolios and funds based on the UN Sustainability Goals.

Ethos lets you select the causes you care about and get personalized ratings of companies, brands, employers, and investments, based on hundreds of credible sources.

Ethos costs $240 or $480 per year.

21 OpenInvest

OpenInvest provides asset management services for advisors. They provide separately managed accounts (through an advisor) and impact reporting for clients. Assets can be held a Charles Schwab along with other brokerage houses.

You are required to have at least $5M in assets with OpenInvest. Their fees are based on the assets they manage. Currently, they do not engage in shareholder advocacy.

-$5M at 0.3%
-$10M at 0.28%
-$25M at 0.2%

22 Morningstar Office

Morningstar is an independent investment evaluator. They have significantly expanded the number of sustainability factors that can be used to evaluate and screen funds. The ESG factors include:

• Sustainability rating
• Environmental risk
• Carbon risk score
• Carbon exposure score
• ESG engagement
• ESG risk score
• Gender & Diversity
• Low carbon/fossil fuel free
• Renewable energy
• Arctic oil and gas exploration involvement
• Oil sands extraction involvement
• Votes counted, % Support, and % Against climate change, environment, ESG governance arrangements, executive compensation, human and workers’ rights, political influence, humane treatment of animals, etc.
• 12-month average fossil fuel exposure, carbon risk score

23 CSRIC

The Chartered SRI Counselor (CSRIC™) certification is available through Kaplan Financial. The Chartered SRI Counselor, CSRIC®, program is a designation program for financial professionals. This program provides experienced financial advisors and investment professionals with a foundation knowledge of the history, definitions, trends, portfolio construction principles, fiduciary responsibilities, and best practices for sustainable, responsible, and impact (SRI) investments.