Historically clients who are deeply concerned about climate change or perhaps want to pursue a socially responsible investment approach have had to compromise on portfolio efficiency. On the one hand they expect a lower return due to significantly higher costs of responsible investing; on the other hand they miss asset classes with higher expected returns such as, Emerging Markets and Smaller Companies. Additionally by omitting “sin” sectors, such as energy and resources, they accept greater portfolio risk from being much less diversified.

However, we are now really excited about some of the new options available to us in the socially responsible and sustainability (SRS) investment space. Certainly we have now overcome the cost barriers as we have funds available from two of the world’s best low-cost institutional fund managers in Dimensional and Vanguard.

Vanguard launched the Global Socially Responsible Investment (SRI) fund in 2011. This fund invests in the FTSE All World index, which is then screened to omit companies which do not comply with the United Nations Global Compact 10 principles, covering policy on human rights, anti-corruption, labour relations and sustainable environmental practices. The fund also automatically excludes any company involved in the manufacture of weapons.

Dimensional are due to launch the Global Sustainability fund in June. This fund will focus exclusively on sustainability and climate change, which in my experience seems to be the theme clients are most commonly concerned about. We also find that the sustainability theme is much less controversial – who isn’t concerned about climate change? In contrast, building portfolios based on social factors is incredibly subjective and every client will have individual views – can we say definitively whether it is good or bad to invest say in alcohol producers?

We now envisage a spectrum of options for investing sustainably and responsibly, encompassing the following:

1. Invest efficiently, and enjoy the best returns possible, but this may compromise your principles. Perhaps you might give more to charity to compensate.
2. Invest as fully as possible in SRS options but compromise on portfolio risk and expected returns.
3. Take a pragmatic approach of doing the best you can without compromising on portfolio risk and returns. So retain important asset classes, such as emerging markets and smaller companies but introduce the new excellent SRS portfolio options we have.
4. Investing for purpose – consider adding some more positive options in areas that can create positive change, such as social impact investment, microfinance, crowdfunding and environment investments such as sustainable timber or wind farms.

The starting point for any client is normally to build up what we might call a “financial independence portfolio”, which involves investing capital first and foremost with the aim of securing financial independence for the remainder of their life. This is intended to be fairly boring (but hopefully very reassuring) as clients shouldn’t be taking chances with their financial independence. Options 1–3 are relevant here.

Option 4 is much more speculative in nature but is potentially much more interesting and engaging.

Please let us know if you have any questions or would like to explore any of the options in more detail.

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