How to tie your investments to your social values

Increasingly, entrepreneurs and investors are seeking innovative markets-based tools to help address pressing social and environmental challenges.

Frequently, investors’ objectives have multiple dimensions, often with a goal of producing risk-adjusted returns alongside positive social impact. Philanthropy, for example, offers tremendous opportunities to drive change, but we increasingly see investors also recognising the power of markets-based tools to assist investment decisions in public markets. We embrace this approach.

This month celebrates Women’s History Month, as well as International Women’s Day, which took place on March 8. From an investment perspective, there is a plethora of academic research that proves that greater diversity in boards and management are empirically associated with improved corporate financial performance. Companies with greater female representation have been found to achieve greater returns on equity, higher price/book valuations, higher dividend payout ratios and superior share price performance. It is not the case that one gender has greater ability than the other but that a more diverse group is better equipped to make decisions that drive the bottom line of companies.

Initiatives to support getting more women into power isn’t just the right thing to do, it’s simply good business. And many asset and wealth management firms are actively channelling capital toward such solutions on behalf of their clients. Firms are deploying innovative technology measures and enhancing partnerships with specialist index providers and asset managers to deliver for their clients.

“Screening” is one way to achieve these goals. For example, an investor looking to align his or her investment goals with their social values can direct their wealth manager to restrict all or a portion of their capital to businesses they consider socially responsible. Whether it’s investing in businesses that have greater gender diversity, fund industries such as renewable energy or provide services for the housing, healthcare or education industries, socially responsible investment (SRI) screening allows investors to invest with their principles.

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There are various levels of screening, which range from excluding certain specific companies to funds that meet an extensive list of specific screens, such as the exclusion of companies that do not meet diversity, workplace and/or environmental standards.

Working with a wealth manager, an investor’s screening methodology can be tailored according to his or her individual interests. Analysts then gather information on industry and company practices and review these according to the predetermined screening methodology. This process enables asset owners to break down the individual impact of their existing positions, or potential investments.

Investors may also access specific passive indices, including those that are focused on rewarding companies committed to women’s leadership or environmental stewardship. There are dozens of mutual funds that screen businesses.

However, relying purely on factor-based screens does have its limitations. Socially responsible screens are typically exclusionary or “negative,” meaning companies, sectors or projects are excluded from the investable universe.

In achieving superior investment returns over the longer term, however, investors seeking social and environmental screens should also consider proactively deploying “positive” screens. This approach allows more active involvement towards selecting companies, sectors or projects that have demonstrated a commitment to being part of the solution to the social and environmental challenges that are important to their objectives. After all, what is included in a fund is likely to prove more important to performance than what is left out.

The process of actively searching (i.e. positively screening) for investments that can achieve superior returns through progressive business practices requires far greater analysis and fundamental research.

To this end, active management and bespoke portfolios are one way to capture the superior investment returns associated with SRI, including gender diversity. Using proprietary processes, specialised strategies can combine an original thematic lens with bottom-up analytics to identify investment opportunities throughout the value chain and across all industries. We see opportunities across equity, credit and fixed income.

This month, being Women’s History Month, is an opportunity to be intentional about celebrating gender diversity. For investors, it is also timely to reflect on the improved corporate financial performance derived from greater female leadership.

Grace Peters is the global equities strategist at JP Morgan Private Bank