Can you invest responsibly and make money, too?

How to invest in a volatile market
How to invest in a volatile market

While socially responsible investing is increasingly important to investors, they still care more about making a profit.

According to a study from Merrill Edge, 88% of Americans say market performance is still the most important factor in their investing.

The majority of people, 60%, say they'd be more likely to invest in a profitable company with values they disagree with over a struggling company that shares their values. And more than half of Americans, 57%, are more likely to invest in the most profitable company, regardless of its sector, rather than a company with a focus on environmental assets.

But what if you could have both profits and impact?

Funds that specifically select companies that make a positive environmental, governmental or social impact (ESG) are one good option, according to Bagley Reid, managing director of Blue Edge Capital in Richmond, Virginia.

"You don't have to give up anything by incorporating the ESG philosophy in your portfolio," says Bagley Reid, managing director of Blue Edge Capital in Richmond, Virginia. "And if you're investing in Europe or Asia, you may even have better returns."

That, he says, coupled with the existing benefits of index-investing — they're low-cost, passive and diversified — makes ESG-integrated ETFs a good option for socially responsible investing.

How socially responsible are ESG-integrated ETFs?

The first generation of impact investing involved simply eliminating from your portfolio the investments you object to.

But now as investor demand (for both profits and responsibility) grows and the access to data expands, ESG-integrated ETFs from providers like MSCI, iShares, SPDR, Nuveen or Just Capital through Goldman Sachs, allow investors to determine the priorities of their investments, down to a very granular level.

Because of the research available to investors, you can not only look for companies that are focused on sustainable natural resources, for example, but go deeper and focus on investments in raw material sourcing or water stress. Or if you're interested in investing in companies that promote social opportunities, you can drill down to find those that provide access to finance or to health care.

"Of course there are folks who will never buy energy and that won't change," says Reid, "But for those who say they'd like to buy the energy company with the highest standards, they can get exposure to that. And they can eliminate the worst of the worst."

What are the trade-offs in investing sustainably?

Research from BlackRock (the firm behind iShares), has shown that incorporating an ESG approach into investment methodology can improve returns without disrupting investment objectives.

Part of the reason is that companies that are socially responsible are more likely to lead in overall management capabilities, says Reid. As a by-product, ESG-conscious investing can help individuals and institutional investors minimize the risks to reputation that some investments can bring.

The annualized three-year performance, as of May 31, 2018, for the MSCI USA Extended ESG Focus Index is 10%. That's compared with the non-ESG parent index, which earns 10.1%. The annualized three-year performance for MSCI EAFE Extended ESG Focus Index based in Europe, Australasia and the Far East is 4.6%, which outperformed its parent index at 4.3%. MSCI Emerging Markets Extended ESG Focus index returned 7.4% for the same time period, which outperformed its parent index at 6.2%.

"In the US you don't sacrifice anything," says Reid. "It is basically parity, and in the international markets, you get a little bump."

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