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Investing to Reduce Inequalities
Promoting change can be done in various ways. As we have seen recently, many people prefer to take to the streets and voice their opinions to protest the status quo. Others prefer to promote change by aligning their investments with their values. This allows them to make a long-term commitment to the issues they are passionate about.
Aligning investments with one’s values is the root of responsible investing. As of 2018, there was around $12 trillion allocated to responsible investing methods, per the Forum for Sustainable and Responsible Investment (U.S. SIF).
Escalating attention to reduced inequalities, or more specifically, racial inequalities in the United States is the issue at the forefront today. As the U.S. SIF report shows, there has been growing interest by investors to tackle inequalities.
McKinsey & Company’s “Diversity Wins: How Inclusion Matters” report shows how promoting diversity can lead to financial outperformance. Not only can promoting diversity attract talent, but it can help with business development too.
It should be noted that this report is the third in a series dating back to 2015, and this most recent report was released before the death of George Floyd in Minneapolis in May.
Ethical Investing
Thousands of asset managers around the globe have become signatories to the Principles for Responsible Investment (PRI) that the United Nations developed. The PRI lists 17 sustainable development goals, which include the goals of gender equality and reduced inequalities.
Hundreds of millions of dollars have been invested in the thematic goal of gender equality, which mirrors the heightened attention on this issue. There are now numerous funds from which one can choose to support this cause.
Investors can align their investments to rid inequalities in multiple ways, including using either equity or fixed income securities. With fixed income securities, investors can utilize impact investing, which enables them to invest directly into individual communities of need. With equity instruments, investors can identify companies that promote diversity within their workforce and supply chains.
Why Invest Responsibly
Over the years, responsible investing has transitioned to focus on inclusion rather than exclusion. This places the focus on the behavioral practices at companies rather than the products they produce. It has led to the focus on the environmental, social, and governance practices of a company.
For many people, it is important to align one’s investments with one’s beliefs. If you believe in something, why not support it? Investments provide the opportunity to make a long-term impact by continually supporting an issue with the goal of a productive outcome.
In the global marketplace where companies are fighting for investment dollars to boost their shareholder value, there is no greater weapon than shareholder money to make a statement.
Risk Management
Wall Street is littered with companies that failed to have proper risk management policies in place.
The greatest risk to a company may not be its competition, but itself. Do you want your investments to be blind to the risk management practices of companies you own?
In the past, we have seen accounting scandals, engineering errors, and trading scandals devastate shareholder wealth. An investment in these sorts of companies is a guess, a gamble at best, and not much of an attempt by any investor to reach his or her goals.
For the investor who owns stock in emerging markets, would you rather own stocks that have strong risk management policies in place or ones that are affiliated with central government intervention?
Investing responsibly does not guarantee that all the companies you invest in will remain competitive, but having a higher degree of risk management may provide them with a business advantage that will bolster their results.
Takeaway
Remember that when you purchase shares of stock, you become a part owner of a company. As a shareholder, you have the opportunity to vote and make your voice heard. You can also align yourself with groups that promote shareholder advocacy, which include organizations like As You Sow. Its website lists current shareholder resolutions with status updates on each resolution As You Sow has been associated with.
Responsible investment is more than just a reaction to current events. It is a way to promote change and has been one of the fastest-growing trends in the investment industry, used by individuals and large money managers alike. Aligning your investments with your values can promote the change you seek as well as provide general market investment returns.
