Investing with Purpose: Understanding Social Values-Adjusted Returns

In the evolving landscape of investment strategies, the traditional focus on pure financial returns is increasingly being complemented by a more holistic approach that considers the alignment of investments with personal values. In Part 2 of our five-part series, we delve into the concept of social values-adjusted investment returns, exploring how they can guide investors toward more meaningful and responsible choices.

What Are Social Values-Adjusted Investment Returns?

Social values-adjusted investment returns extend beyond mere financial performance. They encompass the alignment of investments with an investor’s personal values and the broader societal and environmental impacts of those investments. This perspective is grounded in the belief that the true value of an investment is not solely measured in monetary terms but also in its positive or negative effects on the world.

For instance, consider an investment in a company that boasts impressive financial returns but engages in unethical labor practices. Such an investment may not resonate with an investor’s ethical standards. Conversely, a company that prioritizes fair wages, sustainable practices, and community engagement—albeit with slightly lower returns—could be viewed as a more valuable investment when social impact is taken into account.

Evaluating Social Values-Adjusted Returns

To assess social values-adjusted returns, investors typically utilize Environmental, Social, and Governance (ESG) criteria. These criteria help gauge how well a company’s operations align with an investor’s values, focusing on three key areas:

• Environmental Impact: This examines how a company manages its environmental responsibilities, including carbon emissions, resource use, waste management, and initiatives to combat climate change.

• Social Responsibility: This evaluates how a company treats its employees, customers, and communities, encompassing labor practices, diversity and inclusion efforts, human rights, and community engagement.

• Governance: This assesses the management and governance of a company, including board diversity, executive compensation, transparency, and ethical business practices.

Why Social Values-Adjusted Returns Matter

The traditional investment paradigm often prioritizes maximizing financial returns, frequently overlooking the broader implications of investment choices. Social values-adjusted returns are significant for several reasons:

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

2. Promoting Positive Change: Investing in companies that prioritize ESG factors can catalyze positive social and environmental change. By backing businesses that lead in sustainability, social justice, and ethical governance, investors 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, leading to more stable returns over time.

4. Managing Risk: Social values-adjusted investing can serve as a risk management strategy. Companies with poor ESG practices may face reputational damage, regulatory fines, or operational challenges that can adversely affect their financial performance. By avoiding such companies, investors can mitigate their exposure to these risks.

How to Evaluate Social Values-Adjusted Returns

Evaluating social values-adjusted returns involves a blend of financial analysis and ESG assessment. Here’s a step-by-step approach:

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

2. Research ESG Ratings: Utilize ESG ratings and reports to assess how well companies align with your values. These ratings evaluate companies on various ESG factors, providing insights into their performance in areas like environmental impact and social responsibility. A valuable resource for this is As You Sow’s Invest Your Values platform.

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

4. Consider the Trade-Offs: Sometimes, you may need to weigh potential trade-offs between financial returns and social values. For instance, a company leading in sustainability might offer slightly lower returns than a traditional investment. Reflect on whether the social impact justifies any financial trade-off.

Social Values-Adjusted Returns Evaluation In Action

To illustrate the evaluation process, let’s consider the United Nations Sustainable Development Goals (SDGs) alongside YourStake’s values and financial performance tools. YourStake, an investment research firm, has developed a platform that evaluates not only returns but also risk-adjusted returns and values alignment.

For our analysis, we selected SDG 5 (Gender Equality), SDG 10 (Reduced Inequalities), and SDG 16 (Peace, Justice, and Strong Institutions). We then compared two hypothetical funds: the Green Fund and the Purple Fund. While the actual investments are anonymized for confidentiality, this example serves to demonstrate the evaluation process.

Using YourStake’s methodology, we assessed how each investment aligns with the selected SDGs. The Purple Fund outperformed the Green Fund across all three SDG categories. Next, we analyzed the investment performance, assuming an initial investment of $100,000. The hypothetical growth of the Purple Fund significantly surpassed that of its counterpart.

By combining the two analyses, we found that the Purple Fund not only had superior values alignment but also demonstrated better financial performance. However, it’s essential to note that the analysis is not always straightforward. One fund may excel in values alignment but lag in pure returns. Ultimately, it’s up to the investor to determine how much return they are willing to sacrifice for values alignment.

Conclusion

Social values-adjusted investment returns offer a more comprehensive approach to evaluating the true value of investments. By considering both financial performance and social impact, investors can make informed decisions that align with their personal values while contributing 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 your passions lie in sustainability, social justice, or ethical governance, social values-adjusted investing empowers you to pursue financial returns while making a meaningful impact.

This article is Part 2 of an ongoing series—read Part 1 here. Stay tuned for the next installment, where we will explore further dimensions of responsible investing.