What Is Values-Based Investing?

Most people invest because they want to grow their wealth to reach financial goals, such as a comfortable retirement, a college education for their children, or something else altogether. But that doesn’t mean your investment choices are always driven purely by the pursuit of profit. You may also want to ensure your investments are also making the world a little better.

If so, values-based investing may be right for you.

What is values-based investing?

Values-based investing is simply a term used to refer to an investment strategy that evaluates assets not only for potential for profit and risk, but also whether or not they align with core values. For example, there are Catholic, Jewish or Islamic faith-based funds that screen out companies that don’t align with spiritual doctrine. Values-based investing can also allow you to use your investment dollars to take a moral stand on key issues such as gun violence, climate change, diversity and gender equity. It's all about making it easier to channel your dollars to companies and assets that are aligned with your values.

There are a few common ways that values-based investing is leveraged in a portfolio.

Exclusionary investing: Some mutual funds use a process to exclude companies that do not align with the fund’s value objectives as described in the prospectus and actively manage the fund to not invest in those companies. This is typically called exclusionary investing, as you are excluding companies or industries from your portfolio.

Some common examples of businesses that someone involved in values-based investing might choose to exclude from their portfolio include those that fall into any of the following industries:

• Oil and fossil fuels
• Nuclear Power
• Firearms
• Weapons of war
• Tobacco
• Alcohol
• Gambling
• Adult entertainment

Additionally, you might choose to exclude specific companies that have been involved in business practices that go against your values. For example, it is possible to choose not to invest in companies that practice animal testing, or companies that have been involved in major scandals.

Impact investing: Investments are made in individual companies to generate direct social or environmental outcomes alongside financial returns. This usually involves specific and quantifiable outputs, such as reducing emissions, and it is often associated with private market investments.

Integration: Values-based and ESG data, factors, and ratings are integrated into the investment process when building a diversified, balanced portfolio. Portfolios have similar risk and return characteristics to broader market benchmarks.

Pros and cons of values-based investing

A values-based investing approach provides some peace of mind that your financial health isn’t built in a way you would find immoral. For some people, that can help overcome a barrier that would otherwise prevent them from investing altogether.

Of course, there are some potential drawbacks to bear in mind. For one, it's an additional factor that can complicate an investment strategy. It may exclude entire industries or sectors of the economy and could limit your ability to build a more diversified portfolio. That may or may not impact performance over the long term.

That being said, it’s worth noting that research has shown that many values-based funds perform just as well as other broader market funds. What’s more, companies prioritizing environmental and social factors have historically tended to outperform their competitors who didn’t. Following your values doesn’t necessarily mean that you need to settle for subpar returns, as long as your portfolio is appropriately built and is part of a broader, strategic financial plan that manages the things that can go right, and the things that can go wrong.

 

All investments carry risk, including potential loss of principal and no investment strategy can guarantee a profit or protect against a loss. Past performance is no guarantee of future performance.