There’s a new investment that is likely to generate excitement in my community. It’s the first exchange traded fund (ETF) that invests in companies demonstrating the highest level of support for their LGBT employees. The fund is called the InsightShares LGBT Employment Equality ETF and its ticker is PRID. But before you leap to invest, there are a few things to consider.
How the Fund Chooses LGBT-friendly Stocks
The Human Rights Campaign (HRC) Corporate Equality Index (CEI) compares more than 1,000 American companies to their peers in the area of LGBT workplace inclusion (gender identity protections and transgender-inclusive health coverage, for example). The end result is a concentrated, LGBT-friendly version of the S&P 500 index.
When I heard the news, I have to admit that I was really excited. The fund is in sync with the movement that Abacus has been a part for over a decade as a founding B Corporation (B corp is to business what the USDA organic label is to food). Companies large and small seem to be realizing that they need strong policies on the environment, social issues, and governance (ESG); not just because it’s a responsible move, but because consumers and shareholders are demanding it. Many studies indicate that responsible ESG companies have equal-to-better financial performance than their less responsible peers.
But before you invest in any socially conscious fund, you should get clear about what kind of social return (and impact) you want to achieve. I’ve observed that there are two very different ways in which an investor can align his values with the publicly traded businesses in his portfolio.
Bad Product, Neutral on Behavior
Some people steer away entirely from investing in a company if it operates within a particular industry. This is referred to as “divesting.” An example of divestment is someone not wanting to be associated in any way with a gun manufacturer because they’re livid about gun control. They probably won’t change their mind just because American Outdoors Brand Corp. has strong workplace diversity and a good recycling program.
The downside of not investing a company (because of its industry) is that you lose the ability to change company behaviors and policies. This strategy was effective in the 80s when businesses and pension funds divested from South African companies because of Apartheid. But that was an effort to change corporate policies, not to change their business model. A threat of boycott or divestment could make Walmart decide not to sell guns, since they are not primarily a gun store. It’s almost certainly going to fail to make American Outdoors stop manufacturing guns, since that’s their main business. Divesting may allow you to sleep better at night, but it’s not likely making the world a better place.
Bad Behavior, Neutral on Product
Dunkin Donuts recently agreed to stop using Styrofoam. Social media, consumer pressure, and shareholder advocacy all likely played a role in making this happen. As You Sow, a nonprofit that promotes sustainability through shareholder advocacy and legal strategies, engaged with Dunkin Donuts for years about their recycling policy. Mutual funds are having similar dialogues, and can even vote when shareholders defer to them (proxy voting). If, instead, Dunkin Donuts was simply excluded from all of the major mutual funds because of a poor recycling program, this change may never have occurred.
Yes, I’m biased towards owning stocks in a fund that will use its power and resources to engage with large businesses in an effort to create change at a massive scale (as opposed to simply excluding a company from my portfolio). But you can still have your cake and eat it too, since there are funds that use a screening process while also engaging in shareholder advocacy.
Assessing a Fund’s Greatness
Before you attempt to align your values with your money, make sure you’ve explored all of your options. I celebrate PRID for giving additional visibility to companies that kick ass on LGBT matters, but does that issue trump all the other ESG factors? For example, I saw Apple listed in their index but excluded from another socially conscious investment for labor-management reasons. PRID’s expense ratio was 0.65% when I checked, and I generally like to see US stock mutual fund expenses under 0.50%. Even if you’re willing to pay a little more to align your values with your money, you’ll still want to maximize your returns so you have more to spend (and, of course, give away).
Disclosure: Abacus Wealth Partners is an SEC Registered Investment Adviser. A copy of our current written disclosure statement discussing investment risks, our advisory services, and fees is available for your review upon request. Information presented is for educational purposes only and should not be construed as investment advice as the information may not be suitable for all investors. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not indicative of future performance. Abacus Wealth Partners does not provide legal or tax advice. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.