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By Jon Hale, Ph.D., CFA and Jeremy Glaser | 10-19-2017 11:00 AM

Make Your Investments Speak Your Values

Morningstar's Jon Hale says it's important to keep your asset allocation in mind, but that investors can find ways to express their values with their money.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Jon Hale. He is our director of sustainable investing fesearch. We're going to talk a bit about the growth of sustainable investing and how investors can access it.

Jon, thanks for joining me.

Jon Hale: My pleasure.

Glaser: Let's start by just kind of setting the stage of the growing interest in people wanting to make an impact with their investments. I know you look at a lot of survey data. What have we seen in terms of growth over the last few years, that people are saying that this is something they are interested in?

Hale: We've seen a lot of growth in the last couple of years. There's a lot of investor surveys out there that have indicated this. Morgan Stanley is one that a lot of people look at because it's easily accessible on their website. But they show from even 2015 to 2017, continued growth to the point where 75% of their investor base that they surveyed said they are interested in sustainable investing.

Glaser: It's one thing to say that you're interested; it's another thing to actually to execute on a strategy like this. Is it reasonable to really try to express your values through your investments versus, say, the political process or through other avenues that might be available?

Hale: This gets to this concept of impact investing. You hear sustainable investing a lot. Impact investing, I think, is in some ways another way to describe sustainable investing. In other ways, it's kind of a facet of sustainable investing that sort of just recognizes that anytime that you are trying to incorporate the environmental and social and corporate governance issues and themes into investing, that in addition to your financial bottom line, there is also a broader societal or environmental impact to it. And so, that really resonates with a lot of people, we're finding.

As it relates to whether you should do it or think about it that way or how it relates to the political world, I mean, I think it's perfectly normal and reasonable for an investor to want to have some kind of impact with their money over and above their bottom line that they are going to get out of the investment, especially when so much evidence points to the fact that if you do incorporate ESG issues in a reasonable way into your investment process, it can lead to perfectly competitive returns if not better returns over the long run.

Glaser: Let's dig into what a reasonable way could be. I know there is a lot of different impacts that people want to have. So, it could be, we are doing a panel on this later on, on LGBT investing; it could be on gender lens investing or climate change. With all these different potential issues, how do you decide if you want to narrowly focus on one thing, if you want to look at the world more holistically. What's the best way to think about this for most investors?

Hale: I think, as an investor you need to keep in mind what's the appropriate asset allocation for you as an investor, because you do want to make sure that you're going to reach your financial goals with your investments. So, that's one thing. That would mean that, for instance, you don't necessarily want to put all your money into, say, a renewable energy-focused thematic bond, because that would destroy your asset allocation; you'd be overly exposed to one segment of the market. That's not something you would necessarily want to do.

But more broadly, if you are interested in themes like investing to mitigate climate change, there's a number of broadly diversified portfolios out there that try to tilt the portfolio toward lower-carbon companies or avoid companies with large fossil fuel reserves. That's one way to express your interest in that particular area and to have some kind of impact on that with your money.

There are funds focused on women and women in leadership that you can do the same thing. They are not sector funds. They are broadly diversified funds where you're really getting a lot of exposure to the kinds of large-cap companies that you would tend to need in a broadly diversified portfolio, but it's focused on companies that have women in leadership.

Glaser: If you did want to take maybe a broader approach, what are some of your favorite funds out there that would do that?

Hale: A lot of funds that are sustainable investment funds by intention--this is what they do by prospectus---they all tend to have very strong Morningstar Sustainability Ratings that evaluates the types of holdings that they have. There are a lot of those kinds of funds out there that do a good job in this area.

I would say for a general index fund, the Vanguard FTSE Social Index fund is an appropriate way to get that broad-based kind of exposure. There's a fund company called Calvert Investments that has a wide range of strategies that they have on offer. They're recently purchased by Eaton Vance, but very focused on impact and communicating that well to investors.

Then the final thing I would say, is over on the bond side of things, there's a fund called TIAA-CREF Social Choice Bond that is Bronze-rated by our analysts that has a big section of the fund that's dedicated to proactive social impact-types of bonds. It's a good way to get fixed-income exposure with impact.

Glaser: Jon, thanks for the overview today.

Hale: My pleasure.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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