In Part 2 of my five-part series, we will assess investment returns through the lens of their alignment with your personal values. Traditionally, pure returns were the primary metric for evaluating investments. In Part 1, we expanded this view by considering pure returns in relation to the level of risk taken to achieve them.

More investors are now exploring options that either support values they hold or actively exclude certain sectors, such as fossil fuels. This trend is reflected in the industry, as seen in the 2023 InvestmentNews Advisor of the Year category for Environmental, Social, and Governance (ESG)/Responsible Investing. It’s worth noting that these categories did not suggest that the returns were necessarily better or worse than those in other categories that didn’t factor in ESG considerations. This approach goes beyond traditional financial analysis by also weighing the social, environmental, and ethical impacts of investments.

In this blog, we’ll dive into what values-adjusted investment returns are, why they matter, and how they can guide you toward more meaningful and responsible investment choices.

What Are Social Values-Adjusted Investment Returns?

Social values-adjusted investment returns take into account not only the financial performance of an investment but also its alignment with the investor’s personal values and the broader impact on society and the environment. This concept is rooted in the idea that the true value of an investment is not just measured in dollars and cents but also in the positive or negative effects it has on the world.

For example, an investment in a company that generates high financial returns but engages in unethical labor practices might not align with an investor’s social values. On the other hand, a slightly lower return from a company that prioritizes fair wages, sustainable practices, and community engagement could be seen as more valuable when social impact is factored in.

Social values-adjusted returns are typically evaluated using Environmental, Social, and Governance (ESG) criteria, which help investors assess how well a company’s operations align with their values. These criteria can include:

– Environmental Impact: How does the company manage its environmental responsibilities? This includes factors like carbon emissions, resource use, waste management, and efforts to combat climate change.

– Social Responsibility: How does the company treat its employees, customers, and communities? This involves assessing labor practices, diversity and inclusion efforts, human rights, and community engagement.

– Governance: How is the company managed and governed? This includes board diversity, executive compensation, transparency, and ethical business practices.

Why Social Values-Adjusted Returns Matter

The traditional view of investing focuses solely on maximizing financial returns. However, this approach often overlooks the broader impact that investments can have on society and the environment. Social values-adjusted returns matter for several reasons:

1. Aligning Investments with Personal Values: Many investors want their portfolios to reflect their personal beliefs and values. By considering social values-adjusted returns, you can ensure that your investments support companies and initiatives that align with your ethical standards.

2. Promoting Positive Change: Investing in companies that prioritize ESG factors can help drive positive social and environmental change. By supporting businesses that lead in sustainability, social justice, and ethical governance, investors can contribute to a more equitable and sustainable world.

3. Long-Term Sustainability: Companies that focus on ESG factors are often better positioned for long-term success. They tend to be more resilient, better managed, and more adaptable to changing regulations and consumer demands. This can lead to more stable returns over time, reducing the risks associated with short-term profit chasing.

4. Managing Risk: Social values-adjusted investing can also be a way to manage risk. Companies with poor ESG practices may face reputational damage, regulatory fines, or operational challenges that can negatively impact their financial performance. By avoiding these companies, investors can reduce their exposure to these risks.

How to Evaluate Social Values-Adjusted Returns

Evaluating social values-adjusted returns involves a combination of financial analysis and ESG assessment. Here’s how you can approach this process:

1. Identify Your Values: Start by identifying the social, environmental, and governance issues that matter most to you. Whether it’s climate change, human rights, or ethical business practices, knowing your values will guide your investment decisions.

2. Research ESG Ratings: Use ESG ratings and reports to evaluate how well companies align with your values. These ratings assess companies on various ESG factors, providing a snapshot of their performance in areas like environmental impact, social responsibility, and governance practices. One public source is As You Sow’s, invest your values pages.

3. Analyze Financial Performance: While ESG factors are important, financial performance still matters. Look for companies that not only align with your values but also demonstrate strong financial fundamentals. This includes profitability, growth potential, and financial stability.

4. Consider the Trade-Offs: In some cases, you might have to weigh the potential trade-offs between financial returns and social values. For example, a company that leads in sustainability might offer slightly lower returns than a traditional investment. Consider whether the social impact justifies the financial trade-off.

Social Values-Adjusted Returns Evaluation In Action

Let’s apply the “How to” methodology above using the UN Sustainable Development Goals and YourStake’s values and financial performance tools.

YourStake, an investment research firm, has developed a tool to not only evaluate returns, but also risk-adjusted returns and values alignment. YourStake sells its Advisor Core
Core
toolset to advisers and is not publicly available. We start by selecting goals. After reviewing the United Nations Sustainable Development Goals (SDGs), we decided on SDG 5: Gender Equality, SDG 10: Reduced Inequalities and SDG 16: Peace, Justice and Strong Institutions. Fortunately, YourStake offers the ability to select the UN SDGs. Most research companies have their own definition of a social value, that you may or may not agree with. It’s important to check out their definition to see how closely it fits yours.

Now we select the investments we want to compare. For example, we will compare the Green Fund with the Purple Fund. (For confidentiality, the actual investments have been anonymized as not to bias or focus on a specific investment. This is meant to better illustrate the process.

The values-adjusted analysis assesses how each investment aligns with the SDGs, using YourStake’s methodology. The Purple Fund clearly outperforms all three SDG categories. Next, we turn to the investment performance analysis. Assuming an initial investment of $100,000, as can be seen, the hypothetical growth of the Purple Fund is far superior than its counterpart.

Combining the two analyses, we see that that the Purple Fund has superior values adjusted returns. The analysis is not always so clear cut. One fund may be superior on the values and not on the pure returns. It is up to you to decide how much return you are willing to sacrifice. You may decide to save more or extend your investment time horizon to compensate.

For years, I’ve been asked, “How much will I have to sacrifice to better align my investments with my values?” In this example, the question becomes: how much will you lose by not aligning with your values? YourStake’s platform offers many more goals to evaluate, and while this tool isn’t publicly available, some financial advisors (including myself) have invested in it to leverage its AI engine for portfolio analysis. If your advisor doesn’t offer this tool, or if you can’t find one who does, you can use the public tool from As You Sow. However, keep in mind that this will require more manual effort, as it’s not designed for full portfolio analysis and creation.

Conclusion

Social values-adjusted investment returns offer a more holistic approach to evaluating the true value of your investments. By considering both financial performance and social impact, you can make more informed decisions that align with your personal values and contribute to a better world.

As more investors embrace this approach, the influence of capital on driving positive social and environmental change will continue to grow. Whether you’re passionate about sustainability, social justice, or ethical governance, social values-adjusted investing allows you to pursue financial returns while making a meaningful impact.

(This Part 2 of an ongoing series – you can read Part 1 here)