Investing in Change: Align Your Portfolio with Your Values

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Last week, McDonald’s announced that it will begin phasing out eggs from hens housed in cages. This is extremely significant as the company uses roughly 4% of the 43.5 billion eggs produced in the U.S., and it comes not long after McDonald’s pledged to source its pork and bacon from pigs that are not confined to gestation crates. These changes have occurred due to both consumer and shareholder pressure on the company, as well as efforts by animal welfare nonprofits such as the Humane Society’s farm animal protection program.

You might ask what this all has to do with investing and financial planning. More and more financial advisors are getting requests from their clients to include environmental and social values as part of their investment management. To address this need, Abacus recently launched a new company, Align Impact, which helps advisors, family offices and foundations identify their most important values and allocate their investments and charitable grants accordingly.

Impacting the World with Your Investments

Align’s research has found that different investment types, such as stocks, bonds, real estate or private equity, can have differing levels of impact. For example, a direct investment into a social private enterprise like M-Kopa in Nairobi, Kenya, may help bring electric power to the 75% of Kenyans who live off the grid. Such an investment can have very direct, measurable benefits in the form of increased literacy, income, safety and environmental effects. But only accredited investors (those with more than $1 million) can generally participate, and even then, the amount allocated to private companies must remain both small and highly diversified to be part of a prudent plan.

A larger asset category for most investors is bonds, and here one can invest in municipal offerings that finance schools instead of jails or mass transit projects instead of roads. With real estate, there’s a growing movement to target properties and operators who run their buildings with more energy efficiency, as well as specific funds that focus on affordable housing, charter schools or mixed-use, community-supported projects.

In respect to stocks, the most widely used tool has been financial divestment—avoiding owning companies that one perceives as being harmful or objectionable. While that may feel good morally, it often does little to change corporate behavior unless it becomes part of a major movement adopted by most investors, consumers and the press, as in the case of divestment from companies doing business with apartheid South Africa. Another tool one can use with stocks is greater investment in companies with “positive” products or corporate behavior. As public companies have begun to provide increased reporting about their carbon emissions, use of child labor in their supply chain, and gender diversity in their leadership (to name just a few), more and more investment options have emerged that can target “good” companies.

The Most Post Powerful Tool

I would argue, however, that if you really want to change the behavior of publicly traded companies, shareholder engagement is the most powerful tool. Social advocacy can take the form of directly communicating with a company’s corporate social responsibility (CSR) office or investor relations department, or voting one’s shares in accordance with one’s values on a shareholder resolution. McDonald’s agreed to stop using its highly polluting foam hot beverage cups after a 2011 resolution received positive votes from 29% of the shareholders. There have been other resolutions recently at the company concerning wage disparity, childhood obesity and antibiotic use in animals.

Changing History

The announcement by McDonald’s is a great step forward for both egg-laying hens and investors concerned with animal welfare. But whether your values and concerns are climate change, affordable housing or reforming our education system, there are now better ways to incorporate your values into professional portfolio management. And if enough investors share your values and take similar actions, the capital markets could truly help change the course of history.

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