What is values-based investing – and how can it fit into your philanthropic plan?

Investment strategiesWhat is values-based investing – and how can it fit into your philanthropic plan?

January 27, 2023

Key things to know

  • Values-based investing encompasses socially responsible investing (SRI); environmental, social and governance (ESG) investing; and impact investing.

  • Values-based investing has the potential to combine financial returns with philanthropic impact.

  • SRI and ESG investment strategies have minimal impact on performance when compared with traditional investing, while impact investors will likely need to create their own benchmarks in line with their goals and expectations.

A growing number of families with significant wealth are choosing to align their investments with their personal values and beliefs. This “values-based investing” approach helps put different types of capital to work and can deliver philanthropic impact alongside financial returns.

Values-based investing is especially appealing to younger investors. A survey conducted by American Century Investments found its appeal is higher among millennials (62%) and Gen Xers (55%) than it is among baby boomers (50%).1

What is values-based investing?

Values-based investing is an umbrella term that encompasses socially responsible investing (SRI); environmental, social and governance (ESG) investing; and impact investing.

“With SRI, investors seek to avoid companies in specific industries, or those with specific business practices they believe have negative social and environmental impacts on society,” says Andie Ho, national managing director of investments for Ascent Private Capital Management of U.S. Bank. “ESG screening is similar and uses metrics to determine whether companies should be included or excluded from a portfolio.”

Impact investing is a little bit different from SRI and ESG. This is the intentional pursuit of achieving social or environmental goals with your investment selections, alongside earning a profit. “Rather than avoiding certain investments, impact investors actively pursue companies that are making a positive social or environmental impact on the world,” says Ho.

Examples of values-based investing

One example of ESG investing would involve excluding companies from a portfolio that manufacture products an investor believes are harmful to society, such as alcohol, tobacco or firearms. An example of impact investing would be looking to invest in companies that are engaged in efforts to combat climate change via renewable energy or fight poverty by providing low income housing.

Among the social and environmental causes most important to investors today are:

  • Healthcare/disease prevention and cures
  • Environment/sustainability
  • Improved education
  • Mitigating poverty
  • Gender equality
  • Alignment with religious principles
  • Democracy

Values-based investing and philanthropy

According to Ashlee Woods, managing director of philanthropic impact for Ascent, values-based investing and philanthropy are two sides of the same coin.

 

“Investors can generally expect returns that are closely linked to broad market indices with SRI and ESG investing.”

- Andie Ho, national managing director of investments for Ascent Private Capital Management of U.S. Bank

 

“Many philanthropists today are engaging in philanthropy beyond traditional grantmaking and are willing to invest in companies aligned with their philanthropic interests,” she says. “They are interested in bringing about systemic social change while also generating a financial return on their assets.”

There are several different types of values-based investing strategies related to philanthropy:

  • Program-related investments (PRI) allow a family foundation to support an organization through a loan. PRIs qualify toward the foundation’s 5% minimum distribution requirement. The loan repayment terms vary with each PRI, but there’s a common goal to support the grantee.
  • Mission-related investments (MRIs) allow foundations to invest in aspects of a nonprofit that provide social and economic benefits and are aligned to the mission.
  • Socially responsible investing (SRI) can be written into a foundation’s investment policy as part of its overall investment strategy. When implemented with appropriate analysis and due diligence, SRI carries no more risk than traditional investments.

Does values-based investing limit potential returns?

One common question investors have about values-based investing is whether it could limit potential investment returns. Several recent studies provide a clue. For example, a study by the Morgan Stanley Institute for Sustainable Investing found that there is “no financial trade-off in the returns of sustainable funds compared to traditional funds, and they demonstrate lower downside risk.” And during periods of extreme volatility, the study found “strong statistical evidence that sustainable funds are more stable.”2

“When you screen out a handful of companies using SRI or ESG criteria, investors are still very capable of earning market returns,” says Ho. “Investors can generally expect returns that are closely linked to broad market indices with SRI and ESG investing.”

Standard benchmarks might not be relevant with impact investing, however. Investors may have to define a customized benchmark to evaluate the risk, return and impact of the investment. “Measuring the type of impact you’re looking depends on what matters most to you,” says Ho. “Investors must think creatively to determine how they will measure success in terms of impact, in addition to financial performance.”

A values-based investing strategy can be incorporated into any type of diversified investment portfolio. It depends on the portfolio’s objectives, the investments available, and what values the investor wants to express. For example, you could implement an ESG overlay to your U.S equity exposure, or you could dedicate a ten percent allocation to private impact investments. “It’s both art and science,” says Ho.

How to learn more about values-based investing

Navigating the world of values-based investing can be overwhelming at first, so it’s important to educate yourself. The Forum for Sustainable and Responsible Investment (US SIF) Education Center is one place to start your education and research.

Ascent offers a strategic framework and integrated model that helps guide clients through philanthropic planning and values-based investing decision making. Each client’s portfolio is customized based on personalized recommendations — there’s no cookie-cutter approach.

“We can help align our clients’ values-based investing strategies with their existing philanthropic plan, and also help clients develop the criteria used to make values-based investing decisions,” says Woods.

Learn how Ascent can help you pursue investment and charitable strategies that align with your values and personal goals.

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Disclosures
  1. Investing for Impact: Gaps, Trends, and Lessons. American Century Investments, March 2023.

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