Getting Started with Values-based Investing

Written by

Justin Kuepper

Published on

Mar 16, 2022

Last updated

Mar 16, 2022

Most people choose investments based on their risk and return. After all, the goal is to retire with enough money in the bank. But unfortunately, many conventional portfolios hold tobacco, firearms, and dirty energy businesses. While they might generate attractive returns, many investors would prefer not to support these kinds of companies.

Values-based investing is all about adding your values alongside risk and return considerations. Rather than indiscriminately investing in financially-attractive opportunities, you might factor social or environmental concerns into the equation. The goal is to build a portfolio that achieves your financial goals and matches your values.

In this article, we'll take a look at how you can align your portfolio with your values and become a values-based investor.

What is Values-based Investing?

Values-based investing has been around for centuries in a religious context. For instance, Sharia law prohibits followers from owning investments that pay interest, businesses in unsavory industries (e.g., alcohol or gambling), and companies with heavy debt loads. These rules help align a follower's money with their moral values.

Investors are increasingly focusing on financial fulfillment rather than just financial independence in recent years. They want their portfolios to reflect their values and legacy to the world. And they want to make a tangible and meaningful impact on specific causes, such as climate action, social justice, poverty reduction, or other issues that matter.

There are three common approaches to value-based investing:

  1. Exclusionary - The exclusionary approach involves eliminating investments in tobacco, firearms, and other unsavory industries from your investment portfolio.
  2. Integration - The integration approach involves integrating environmental, social, or governance factors into financial investment considerations to find opportunities.
  3. Inclusionary - The inclusionary approach involves directly investing in companies creating positive change in the world.

Exclusionary and integration approaches are easy to implement, thanks to the widespread growth in ESG funds. For example, roboadvisors Betterment and Wealthfront offer sustainable portfolios that leverage exclusionary or integration approaches. However, there are fewer options for investors seeking inclusionary investments.

Setting Goals for Your Money

The first step in values-based investing is determining where you want to make an impact. While some investments can help you make a broad positive impact, you may prefer to target their capital toward solving specific goals that matter most to you. And creating a list beforehand can help you quickly filter through opportunities.

The United Nations' Sustainable Development Goals (SDGs) provide a helpful framework for setting values-based goals. They consist of 17 areas where urgent action is needed, including affordable clean energy, poverty reduction, gender equality, clean water and sanitation, zero hunger, and climate action, among others.

Some questions to ask when setting goals include:

  1. What changes would you like to see over the next 20 years?
  2. Do you want to have a local or global impact with your money?
  3. What SDGs are most related to your vision for the future?

At the same time, you should have a clear idea of your financial goals. These are the goals that you'd typically set with a financial advisor, including retirement savings, college savings, and rainy day funds. By setting these goals, you can filter investment ideas based on your risk tolerance and return requirements.

Some questions to ask in that regard include:

  1. How much do you need in retirement?
  2. How much can you save each month?
  3. What returns do you need to meet your goals?
  4. How much risk are you willing to take?

Building a Values-based Portfolio

The next step in values-based investing is building and maintaining a portfolio. If you're taking an exclusionary or integration approach to values-based investing, then there are many ETFs and mutual funds available to help meet your goals. You can even use robo-advisors to help set and adjust your portfolio over time to meet your goals.

Some popular advisor-based options include:

  • Sustainfolio provides four portfolio options, including Core ESG, Environmental Impact, Social Impact, and Governance Impact. These portfolios are fully-diversified, automatically rebalanced, and optimized to meet your goals.
  • Carbon Collective offers multiple portfolios that divest from companies fueling climate change and invest in those solving the problem. The company's expense ratio is also much lower than most conventional financial advisors.
  • NewDay provides eight impact portfolios that address everything from climate change to clean water to diversity and inclusion. And you can customize each portfolio to reach your goals.

Advanced investors looking for inclusionary investments to maximize their impact can choose from debt-based or crowdfunding investments. Non-accredited investors can invest up to 10% of their net worth in crowdfunding investments, but they typically have less liquidity and safeguards than public securities.

A good middle-ground involves investing primarily in conventional ESG funds with 10% in inclusionary private investments. That way, you can maximize your impact and still have a mostly-conventional portfolio of stocks and bonds to finance retirement goals. 

The Bottom Line

Values-based investing is becoming increasingly popular as people look beyond financial returns to maximize their impact on the world. While impact investing remains in the early stages, equity and debt crowdfunding opportunities have made high-impact products more accessible to everyone—not just high net worth investors.

Beyond investing, there are also many ways that you can put your checking, savings, and credit card spending to good use.