Socially Responsible Retirement Investments
Building a Better Future for Our Employees and the World
By Iliana Maifeld-Carucci
As an employee of Data Machines Corp., I am among those fortunate Americans who have an employer-sponsored retirement plan. Yet, having a degree in data science and not finance or economics, a year ago I could hardly tell you the difference between a Traditional and Roth IRA. So when it came time for me to choose the investments for the funds I put into my retirement account, I contacted our financial advisor Lourdes McMichael, CFP® at Edward Jones, who works with DMC to administer the company’s retirement plan and provide financial advice to its employees. Lourdes introduced me to DMC’s preselected retirement funds and outlined everything from a good investment strategy to the available large, mid, and small-cap funds. I knew that I wanted my money to be used in a socially responsible manner; as we looked at the prospectus for each fund, I was increasingly disheartened. Would I have to put my money towards companies that directly conflicted with my values? It seemed likely that if I wanted to pursue a financially sound retirement strategy by using the benefits of an employer-sponsored retirement plan, my money would be supporting companies with colossal global footprints and a list of ethical violations large enough to encircle the very planet that they were damaging.
Investing in Our Values
After voicing my concerns to and being given the green light by our CEO Eric Whyne, Lourdes and I set out on an expedition to uncover more socially responsible investment options to include in DMC’s retirement plan. I researched the scope of retirement assets in the United States and found that, as of the end of 2019, there was a total of $32.3 trillion in U.S. individual retirement assets invested representing approximately 63% of households. I also learned that I was far from alone in wanting my money to be invested according to my values, discovering that, of those surveyed in 2019, Morgan Stanley found that 85% of investors were interested in sustainable investment. DMC values high ethical standards, sustainability, and community involvement, and I knew that my coworkers also cared deeply about the world, leading me to see that adding SRI retirement options would help bring the company more in line with its values as well as the values of its employees. Furthermore, these SRI funds are not just popular, but financially lucrative. During both the market growth of 2019 and high market volatility of 2020, Morgan Stanley found that sustainable equity and taxable bond funds outperformed more traditional funds. Due to the continuing demand and superior performance, there is now a value premium on these types of funds. This awareness fueled the journey of establishing such funds as options in DMC’s retirement plan. While new territory for DMC, the adoption of SRI retirement funds is readily replicable by other companies and is important as interest in and the value of ethical investing increases.
What is Socially Responsible Investing?
Socially responsible investing (SRI), also known as sustainable investing, ethical investing, or values-based investing, is an investing strategy wherein focusing on financial returns is augmented by a focus on companies that contribute to positive social and environmental impacts. While issues that may be encompassed in SRI depend greatly on the individual investor’s values of interest, they can include supporting fair trade, community investment, environmental sustainability, and social justice as well as the concurrent avoidance of other issues such as tobacco, oil and gas, or alcohol. However, due to the often temporal nature of SRI issues going in and out of favor, these types of investments are generally evaluated on three more stable core factors: environmental, social, and governance (ESG). These ESG considerations comprise a collection of standards by which to evaluate the operations of a company. Environmental criteria investigates how a company contributes to environmental sustainability and the environmental risks they carry, while social criteria looks at the relationships a company holds with their employees, customers, suppliers, and community. Governance principles evaluate a company’s leadership, accounting practices, and avoidance of conflicts of interest. These are the main SRI principles by which Lourdes and I evaluated funds to include in DMC’s retirement plan.
Choosing SRI Funds
We began our SRI fund selection process by looking for organizations that specialize in ESG research. While there are many ESG rating providers, we chose to use Sustainalytics and Morningstar due to their close partnership and well-documented rating methodology. Sustainalytics is an organization that focuses on translating ESG factors and corporate governance research into ESG risk ratings for individual companies. They work directly with one of their stakeholders, investment research firm Morningstar, who uses these ESG risk ratings to generate the Morningstar Portfolio Sustainability Report and the Morningstar Portfolio Carbon Impact Report. These two reports were essential resources to me and Lourdes while examining factors such as individual ESG scores and Morningstar’s Sustainability Rating, which is a portfolio rating generated by taking an asset-weighted average of a company’s ESG Risk Rating as provided by Sustainalytics, followed by a weighted average of the trailing 12 months of these scores, and finally ranking a portfolio within their Morningstar Global Category. Another factor was Morningstar’s Low Carbon Designation, which is given to a portfolio if they have a 12-month average Morningstar Carbon Risk Score below 10 (which is generated from Sustainalytics’ Carbon Risk Rating) and a 12-month average Fossil Fuel Involvement less than 7% of its assets. Specifically, we chose funds that had the highest Morningstar Sustainability Rating, lowest percent rank in sustainability in their global category, the lowest ESG scores among the fund’s largest holdings, Morningstar’s Low Carbon Designation, and lowest fossil fuel involvement. Based on these and other component metrics, Lourdes and I chose a set of funds that represented a diversified portfolio and was also SRI-focused.
Had I chosen a compilation of the funds previously available through DMC’s retirement plan, I would be contributing money that benefits organizations I do not believe in. But there is a far better option available for individuals who care about the type of companies they support in the form of socially responsible investment funds. The process of adding options to retirement funds that are focused on socially responsible investment is straightforward and increasingly meaningful for companies to undertake as interest in these kinds of funds continues to grow. It is important to work with a financial professional when establishing a retirement plan to make sure the chosen fund options reflect the values of your business and the values of your employees. For example, indicating interest in SRI options early is valuable, since retirement plans can be more difficult to change once employees have money invested. Including SRI options in a company’s retirement plan can help attract talent, strengthen corporate social responsibility, provide strong retirement returns for employees, and – if adopted on a large scale – significantly contribute to positive societal change. If you are looking for a skilled financial professional, wanting to add SRI options to your company’s retirement plan or develop a financial strategy uniquely tailored to you, your family, and/or your business, our financial advisor is happy to speak with you and set you on the right path. You can reach Lourdes R. McMichael, CFP® at 703-430-9883 or via email at lourdes.mcmichael@edwardjones.com.
References
https://www.ici.org/pdf/2020_factbook.pdf
