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January 8, 2024 Industry outlook | BANKING & FINANCE

Key considerations for values-based investing in 2024

Rosa Y.C. Chen

In the last few years, there has been a surge in the popularity of values-based investing.

At a time when ethical, moral and political beliefs have infiltrated every aspect of American life, personal investment has the appeal of aligning values and actions, all while securing investors’ financial future.

Large firms such as BlackRock, S&P and MSCI have helped with the drive towards values-based investing by developing and promoting funds built around specific ideals of environmental and social responsibility and corporate governance (ESG).

These and other ESG-linked products have done well, now accounting for more than $30 trillion under management worldwide.

Yet, in the last year, these funds have been the subject of major backlash, specifically from lawmakers and investors.

What 2024 holds for ESG-linked products is uncertain, but values-based investing isn’t going away. Portfolio managers should be prepared to integrate values of all types in a way that assures capital preservation and appreciation.

New name, same investment strategy

Thoughtful investment strategies have long incorporated environmental, social and governance concerns.

Evaluating foreseeable risks and integrating them into a comprehensive company and stock analysis has always made sense in best-in-class investing.

Risks include poor labor practices, which lead to higher turnover and higher labor costs; misaligned financial incentives that lead to capital misallocation and operational mismanagement; ineffectual marketing and public relations that generate negative publicity and create bad reputations; and lastly, violations of environmental standards and laws, which could mean large regulatory fines, massive cleanup costs, and in some cases, bankruptcy.

All of these risks can compress earnings and cause the stock price to fall. Taking these things into consideration isn’t about a social stance or political perspective; it’s part of a prudent risk management framework.

Beyond these considerations, clients may wish to reflect their own personal values with their investments.

For example, one client may want to own defense companies, while another may want nothing to do with companies that profit from war.

A portfolio manager must integrate those beliefs and desires into the portfolio when making the investments that will also serve the client’s financial interests.

Know what you’re getting

Once an individual or institution decides to incorporate values into their investment strategy, there is the question of what kind of financial product will serve them best.

A number of ETFs and mutual funds have been introduced into the marketplace geared towards values-based investing.

However, due to the diversity of values as well as the multitude of ways ESG can be defined, it’s hard to know exactly what investors are buying without significant research and monitoring.

For a mutual fund, the conscientious investor should review the prospectus and research fund management to ensure it aligns with their philosophies.

For both mutual funds and ETFs, the investor will want to review the holdings and assure that they agree with them.

For example, an ETF could be focused on solar companies, but include a couple oil and gas companies because they are moving into renewables. This may not align with investors who do not want any oil and gas.

Investors whose values are more nuanced or shifting are more difficult to contain in a single fund or index. These investors are likely to have more success with individual securities.

In the end, though, there is no reason a diligent investor can’t feel good about both the companies they invest in and their returns.

Rosa Y. C. Chen is director of research and a portfolio manager at Hartford-based registered investment advisor Bradley, Foster & Sargent.

Check out the rest of HBJ's 2024 economic forecast issue

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