By John Owens, CFP®, EA, ECA, CPWA®

Building Socially Responsible Investments into a Globally Diversified Portfolio

By John Owens, CFP®, EA, ECA, CPWA®

A common question that arises in many of the investment management discussions we have with clients is around Socially Responsible Investing (SRI) and how it should fit into a portfolio. Now, if you haven’t already, you should take a look at our blog from a while back where we talk about what Social Responsibility is, and how to think about it overall. Today’s focus will be specifically on portfolios and investing in a socially responsible manner.

So we’re all on the same page, let’s define SRI. SRI is a means of investing that looks not only at financial results but also at the social or societal impact of an investment. Let’s say you have to pick between two stocks, valued about the same, with similar growth potential. One produces tobacco products and has been cited for marketing them to minors, while the other manufactures geothermal energy units for homes. If you’re looking purely from a financial perspective, either may make sense. If you’re looking through an SRI lens, then you’d likely go with the geothermal energy folks.

There are a lot of investments that focus on social responsibility, but here at Brooklyn FI, we have certain core principles that guide our investment selection process. In particular, we want to choose low-cost, broadly diversified index funds that look like the world around us. We also aim to invest in funds that don’t have significant turnover such that they create tax surprises via capital gains distributions.

With these principles in mind, we’ve developed our Core + SRI models. These portfolios consist of broadly diversified index funds we use in our Core Models, while also substituting in funds that specifically have an SRI component. Let’s take a look an example.

Here we have a comparison of the Vanguard Total Stock Market ETF (VTI) and the Vanguard ESG US ETF (ESGV). While they look similar, you’ll notice that ESGV has almost no allocation to Energy, while VTI has 2.5%. ESGV also maintains much smaller allocations to utility companies and industrials.

This SRI fund is an exclusive fund, meaning that it filters out investments that don’t fit its socially responsible mandate. Categories of exclusion include: pornography, alcohol, tobacco, weapons, fossil fuels, gambling, nuclear power, and companies that lack diversity.

Depending on the size of the portfolio, we’ll assess whether it makes sense to own our Core funds, the SRI fund, or a mix of both. And in certain asset classes, we’ve yet to identify an ESG fund that is a suitable replacement for our core allocation.

Fundamentally we understand that many clients desire a portfolio that reflects their values. At Brooklyn FI, our Core + SRI models are rooted in our investment process, designed to reflect the global stock market, align with clients goals and risk tolerances, and be mindful of socially responsible values we share.

If you’d like to learn more about our investment philosophy and how Brooklyn FI can manage your portfolio in a socially responsible way, reach out to one of our planners.