Have you considered socially responsible investing options in your retirement plan? Have you considered investing in Google, Apple? They are just a few of the companies that make up the Calvert Social Index. Many financial professionals don’t believe that individuals are actually interested. They believe people just want returns. However a 2013 study by New York University Stern Business School showed that consumers will actually pay more for socially responsible products.
Many employees feel disconnected from the investments in their 401(k) plan. Adding socially responsible investments is an opportunity employees to connect with an unfamiliar investing process. Saving and investing can feel disconnected when you won’t be touching it for 20 to 40 years.
What is socially responsible investing?
Socially responsible investing is simply adding non-financial investments screens to the due diligence investment process. Three common approaches to implement socially responsible investing (SRI) are screening, shareholder advocacy, and community investing.
- Screening is the most widely practiced approach to SRI. It involves taking socially responsible investment criteria into account when making investment decisions. In the earliest applications of screening these screens were often rigidly exclusionary such as no investments in companies that produce alcohol, tobacco, or firearms. It is now much more common to use scoring systems that rate companies on environmental, social and governance criteria in the due diligence process. By scoring these so called ESG factors it is possible to include companies that, while not perfect from an SRI perspective, are above the norm for members of the peer group.
- Shareholder advocacy is a form of shareholder activism intended to influence business decisions by exerting ownership rights, such as by proxy voting.
- Community investing involves providing capital to communities that are deemed to be underserved by the marketplace.
Socially responsible investing as part of a prudent investing process
The Center for Fiduciary Studies offers guidance on selecting a socially responsible investment. Practice 2.7 applies when you as a fiduciary elects to include socially responsible investing criteria when selecting investment options. In those circumstance, it requires your investment policy statement to define the appropriately structured socially responsible investment strategies that are to be applied.
Screening is the most widely used SRI strategy. In order to be help make sure SRI screens employed do not systematically damage performance, two best practices are:
1. Run due diligence without an SRI screen first then apply the SRI screen to the finalists, and
2. In participant directed defined contribution plans, for each asset class in which an SRI-screened investment is offered, also offer a non-SRI screened investment
Best practice for fiduciaries is to use standard market indexes to assess performance, rather than SRI specific benchmarks. Remember, that whenever we are measuring performance, it is against performance of the asset class not some limited version of that class.
The key fiduciary concepts to keep in mind are:
- Duty of loyalty is specifically oriented to serving the investors’ best financial interests
- Exclusive purpose rule. Retirement plan sponsors are to focus on meeting the retirement benefits of the participants over addressing ways to serve the greater good of society.
The best policy for the fiduciary is to treat socially responsible investing strategies as you would any due diligence process. Do sufficient research to identify SRI strategies that are likely to be prudent, effective, and practical to implement and that are regularly monitored whether in fact they are accomplishing the intended results.
Thinking of incorporating socially responsible investing strategies
Many employees would be happy to hear that you have made it possible for them to invest in companies like socially responsible companies. You might survey their desires for sustainable investing, Christian investing or Sharia investing. These are all subsets of socially responsible investing. Adding these screens to your plan’s menu will cost the company nothing. However it should speak loudly to your employees. They will get a sense that the company cares about its employee’s retirement needs as well as their employees’ values.
It’s important to work with an advisor that understands socially responsible investing and has access to resources to support it.
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