Welcome to the Franklin Watkins Financial Group blog! Our purpose is share helpful ideas and our thoughts on a wide range of financial topics. Some days we’ll focus on education and other days it will be on strategies to help you achieve your financial goals.

I want to start by answering a question I’ve been receiving regularly over the last few months. What is values based investing and how do we incorporate it into a portfolio? With all that’s happening in the world, it’s no surprise more people are asking these questions.

At its core, values based investing is where we overlay certain screens to only invest in companies that align with your values and worldview. The two most common type of screens we see are:

  1. Religious Screens
  2. Socially Responsible Investing or ESG Screens

Religious screens or faith based investing is driven by the religious beliefs of Christians, Catholics, or Muslims. The investment options for religious screens have been very limited in the past but are improving.

Where we are seeing significant growth is in the Socially Responsible Investing (SRI) screened portfolios. That market has grown to $12T in investments as of the end of 20181. Many people also call this ESG which stands for Environmental, Social, and Governance. Here are a few examples of what they screen for in each category:

  • Environmental – carbon footprint, green products, recycling and safe disposal practices, and use of renewable energy. 
  • Social – treatment of employees, safety practices, ethical supply chain, and being involved in social justice issues. 
  • Governance – diversity of the board of directors and management team, transparency in business and accounting practices, history of lawsuits, and excessive executive compensation.

Another tool that’s used is both positive and negative screens. For example, if we’re using a negative screen we would exclude Exxon because of their use of oil. With a positive screen, we are looking for companies who are actively involved in that category. A good example of this is Nike which has vowed to use 100% renewable energy by 2025 and be carbon neutral by 20302.

Will these values based screens affect my investment performance?

This is a question that always comes up in our discussions! Ten years ago, I definitely would have said that using these screens will impact your portfolio performance due to the investment performance we saw. I still believe this will be the case moving forward with the religious screens because the choices are fairly limited.

With SRI/ESG investing, I do not believe investment performance will be affected moving forward. As I mentioned earlier, trillions of dollars are flowing to these investments which is causing more investment firms to offer these screens and put their best investment teams on them. Secondly, companies don’t want to be left out so they are improving their business practices which means the pool of investments we can choose from is much larger.

If this is something you’d like to learn more about, please don’t hesitate to contact us and we can help you decide what options will work for your unique financial situation.

  1. Here’s what you need to know about the 12 Trillion Dollar ESG Investment World
  2. ESG Investing Thrives Amid Coronavirus Pandemic