What is Values Based Investing?

Kamber Lucas |

Values Based Investing, often referred to as Socially Responsible Investing (SRI), is a form of investing where investments must pass screens for significant personal values. Investment selection may be informed by faith, environmental impact, social factors, or corporate governance. For example, one investor may choose to purchase a fair-trade chocolate bar to support wages abroad while another chooses to purchase a vegan chocolate bar of a similar quality. In both situations a chocolate bar is purchased, but in the first scenario the investor prioritizes social responsibility while in the second the investor’s values may be more directed towards environmental protection or animal rights.  

Values Based Investment screens generally fit into the three general categories of Environmental, Social, and Governance (ESG), Socially Responsible Investing (SRI) and Impact Investing. The definitions of the screen are broad because personal values about any criteria can vary between investors.   

                     

                     

 

Traditional Investing 

The criteria for Traditional investing is based on the company’s financial health, market position, strength of management, potential resilience to perceived risk, and its potential experience in the overall economy. Values based investing takes all the criteria of Traditional Investing and adds additional factors. Investment performance is still critical, but not the only factor.   

TYPES OF VALUES BASED INVESTING 

Environmental, Social, and Governance Investing (ESG) 

ESG focuses on driving returns by considering how Environmental, Social, and Governance factors affect performance beyond traditional financial analysis.  

An ESG screen might reduce or eliminate oil companies if carbon emission regulations are increased. Oil is not eliminated from the portfolio primarily because of its impact on the environment, but because of how it would be affected by environmental regulations. Investors can choose which ESG metrics they want applied to their portfolio. The screens typically include: 

 

Environmental 

Social 

Governance 

Energy consumption 

Human rights 

Quality of management 

Pollution 

Child and forced labor 

Board independence 

Climate change 

Community engagement 

Conflicts of interest 

Waste production 

Worker health and safety 

Executive compensation vs employees 

Natural resource preservation 

Stakeholder relations 

Transparency & disclosure 

Animal welfare 

Employee relations 

Shareholder rights 

 

Socially Responsible Investing  

Socially Responsible Investing (SRI) takes ESG one step further and excludes or includes companies or entire industries based on investor preference. In SRI, returns and values based impact are generally equally considered. An investor may find that a certain company has very proactive environmental standards, good gender/racial inclusion as well as participation in funding local charity projects, but still decides to exclude them from their portfolio because they are an oil business, and this investor prefers green power. 

Impact Investing 

Impact Investing puts the values based impact as the highest priority. Return on investment is sought, but is secondary to the investor’s goal of creating positive outcomes, whether they be environmental, social, faith, or governance focused. This could include the creation of a public benefit corporation or the funding of a school in a developing nation. This investment method is harder to pursue as a retail investor, but it possible with investment advisors who pursue this area. 

A Personal Choice  

There are many forms of Values Based Investing and the goals are in the eye of the beholder as personal perspective and personal choice are the driving factors of the Values Based Investing philosophy. What is more standardized are the methods to achieve the values based impact. An investor can include certain metrics (ESG), exclude/include certain industries (SRI), or start an enterprise that may not profit (Impact Investing). What they all have in common is that as a Values Based Investor, you (the investor) aims to have a values based effect on society. 

Kamber Lucas graduated from the University of Wyoming with a degree in Business Administration.  He was a Peace Corps volunteer in North Macedonia and is currently WWOOFING throughout the United States.  He has been accepted into the Social Impact MBA program at Colorado State University.