Clients have become increasingly vigilant about aligning their investment decisions with their values, says Boston advisor Chat Reynders.
The chairman and CEO of Reynders McVeigh Capital Management says he has grown his firm to $900 million in about eight years by relying on socially responsible investing, sometimes called impact investing. The strategy, he says, has allowed him to better connect with younger generations, avoid portfolio liabilities and improve transparency with clients.
Reynders offers five suggestions for advisors hoping to bring socially responsible practices into their own firms.
1. Empower the client. People define social responsibility differently, so let your clients determine which issues mean the most to them, Reynders says. Some might be particularly concerned with climate change, for example, while others may believe that animal welfare is a more critical issue. Develop a customized investing policy with each client.
2. Focus on transparency. It is critical for advisors to help clients understand the assets they own. It's the advisor's responsibility to delve into company balance sheets and understand how they turn revenues into earnings, Reynders contends. Companies that hide assets in off-balance-sheet pockets or create earnings through accounting adjustments are companies that do not meet socially responsible standards.
3. Look for both positive and negative. Impact investing traditionally had negative screens -- companies or business activities to avoid -- but socially minded advisors should implement positive screens as well, says Reynders. Good managers must recognize that in areas of significant social disruption (such as climate change, resource access, health care efficiency and efficacy, technology innovation, new manufacturing and mobility), there are tremendous opportunities to find positive and durable growth stories.
4. Realize socially responsible policies are dynamic. Over time, different issues may emerge. In the years going into the financial crisis, many funds were successful at avoiding traditional areas of concern, like nuclear weapons and animal testing, yet banks and financials were the largest sector weight in almost every SRI fund, Reynders says -- despite coverage of what proved to be the extraordinarily irresponsible debt build-up in the financial sector. Insight, analysis and a constant review of investment theses are critical to maintain dynamism in any impact-driven portfolio.
5. Remember: Trends are long term. It's an investing truism that advisors need to focus on sustainable long-term trends, not just short-term considerations. This is even more true in socially responsible investing, Reynders says. Long-term trends create durable returns and allow clients to benefit from compounding results over time.
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