The Other Side of Investing
by: Luke T.
The topic of “investing” conjures images and dreams of financial success punctuated with high-percentage returns and piles of cash. Popular movies, such as The Wolf of Wall Street and The Big Short, display the power and potential of investing to instantly create vast wealth. However, what if there is more to investing than the money?
Let’s begin by exploring what investing means. The general arena for individual investing is in the public stock market. When you invest in the stock market, you exchange your cash for shares in a company. These shares are equity in the associated company, representing ownership of the business itself.
If you really love iPhones and that’s all you know about Apple, you could purchase shares of Apple Inc for $1,000 and become a shareholder of your favorite cell phone! Although you would only own 7 of the more than 16.5 billion shares of Apple Inc., your ownership allows you to share in the company’s profits. These financial returns are realized in two primary ways:
- Dividends — the company directly sends you a standardized amount of cash per share
- Capital Appreciation – as a company grows successful it’s value in the stock market increases. As a result, the value of your shares in the firm will (normally) rise. This appreciation of your capital means you can sell your stock and receive not only your original investment, but the amount of gain in the stock price as well.
But what if there is more to the story than personal profit? When you decide to own a company through purchase of its stock, your money is used to support that business. However, what if the operations and activities of the business cause harm to others or conflict with your values and beliefs? Businesses that sell tobacco, fund abortions, distribute pornography, or engage in activities that are detrimental to the environment are examples of such business practices. Should you still own shares in these companies?
The answer to that is not black and white. You must decide for yourself to what degree you will live out your beliefs and if those beliefs can or should, trickle down to investing. Perhaps you haven’t thought of investing and values as being related before. Don’t worry! It is possible to adjust your personal investing philosophy to reflect your beliefs and values without sacrificing financial return. Here are different values-based investing strategies that take the company’s business model and operations into consideration:
- Socially Responsible Investing. This investing plan seeks to avoid companies that negatively impact the social and political climate. Some examples are screening out alcohol and tobacco and placing value on companies that are active in their communities.
- Environmental, Social, and Governance (ESG) Investing. As the name implies, the goal here is to invest in businesses that benefit the environment and its stakeholder groups. Sustainable energy companies and human rights in the labor force are popular examples.
- Impact Investing. This investing plan aims to influence change through investor activism and majority ownership, often in private markets. Recent examples are the actions of investment firm Third Point and hedge fund Engine No. 1 to incite a turn toward environmental operations at Exxon Mobil and Shell respectively.
The broad umbrella of Values-based Investing encompasses these methodologies and is geared toward acquiring an investing portfolio that complements the values of the individual. When you understand that investing is ownership, you see that your money is tied to the company’s products and services. Savvy investors can begin to be the change they would like to see by carefully considering in what companies they will invest. In addition to dividends and stock price appreciation, they gain the peace of mind that comes knowing that your money is helping promote the values and beliefs that matter most to you.
References:
https://www.kiplinger.com/investing/601240/sri-vs-esg-vs-impact-investing
https://pitchbook.com/blog/what-are-the-differences-between-sri-esg-and-impact-investing
