Strategic Financial Planning and Socially Conscious Investing

By Jeremy Sorci | October 18, 2018

You’ve heard the expression, “Don’t judge a book by its cover.” This saying proves true in so many areas of life, but you probably don’t think of it in terms of socially conscious funds. This article explains why you should.

Wealth Planning and the Socially Responsible Debate

Jeremy Sorci is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyIf I were to ask 20 people to define socially responsible investing, I’d likely get 20 different, but similar, answers. Ironically, if I were to research 20 different socially responsible mutual funds, I’d likely see 20 vaguely similar, but different mutual funds. Therein lies the trouble for investors.

“Socially responsible” and “environmentally sustainable” are wonderful ideas. They make people feel good about the companies they’re supporting in an age where news about oil spills, gun violence, and addictive vices barrage us daily.

Many investors also have the feeling that investing in socially conscious funds will “stick it” to the huge conglomerates that are crushing small business owners and squeezing them out of the market. Is this really an accurate assumption? When my clients talk with me about investing in a socially responsible or environmentally sustainable fashion, these are the ideas they often expect to be true, based largely on the name of the socially responsible fund.

Unfortunately, and predictably, there are no standardized rules that establish what "socially responsible" means in terms of investments. It is up to the fund company and fund managers to create a screening process that determines which companies will be allowed into the fund and which will be excluded.

Often, hard measures, such as pollutants created during manufacturing processes can determine whether a company is included or excluded from a fund. Another fund manager may view the large amounts that same company donates to impoverished areas as being socially responsible and allow them into his fund. The entire process is very subjective.

Should Holistic Wealth Planning Attempt to Include “Socially Responsible” Brands?

I recently researched the randomly-selected VALIC Company II Socially Responsible Fund (VCSRX) and looked at its holdings as of 6/17/13 (according to Morningstar.) The first publicly-attainable security listed was Microsoft--probably not what any of us "Big-Business/Monopoly avoiders" would expect to see in a socially responsible fund.

Also on the list were Johnson & Johnson and Colgate-Palmolive. According to PETA, if “no animal testing” meets your definition of socially responsible, you’ll probably not want to see these companies included in your fund, either. The green-energy folks could invest happily, except that this fund holds Spectra Energy, Emerson Electric, Anadarko Petroleum, National Oilwell Varco, and others.

I'm not trying to judge or pick on the VALIC fund company; they were just a random example. My point is that I’ve yet to see a socially responsible fund that didn’t hold at least one company that went against somebody’s definition of what socially responsible means. Because of this, we feel it would be imprudent, on the part of an investor, to purchase an investment based solely on the fund's name.

Your Financial Strategies are Doing it the Right Way - Right?

Jeremy Sorci is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyHow can one invest intelligently on a socially conscious level? One method would be to own individual stocks, researched one-by-one and purchased according to the individual investors’ own screening criteria. But, remember that it takes A LOT of individual securities to make up a diversified portfolio and, unless your name is Warren Buffet, you’ll probably have to sacrifice diversification for your socially responsible agenda.

Will you be able to sleep at night with this level of risk? Does the risk balance with the potential reward? Is it even possible to know the level of commitment a company will have to social responsibility today, tomorrow, or over the next ten years? Some investors are comfortable with this additional risk. Others investors address their social concerns by the products they buy and support rather than the investments they hold.

In the end, just like the ideal of social responsibility, participation becomes a matter of personal choice.