Why ESG Investing Is 'a Mess' and What to Do About It

It is difficult to screen for your values. We recommend investors select several of their top priorities and align their investments with those values. 

This can either be avoiding companies that profit from activities that do not align with your values, such as pornography, or investing in companies you believe are adding value to the world, such as a pharmaceutical company working on cancer drugs.

What exactly is values-based investing, does it include spiritual and/or non-spiritual objectives, and can it include ESG?

It is hard to base an investment on a spiritual objective. Those objectives do not usually offer financial returns. Values-based investing is more about deploying capital to companies you believe are adding value to the world and avoiding companies you believe are removing value or preying on people.

For example, investing in a biotech company researching potential treatments for cancer that can improve the lives of people across the globe, while avoiding investments in large tobacco companies that have contributed to significant smoking addictions among children and teens in the developing world. 

Environment, social, and governance is a common theme through all values-based investing. Investors care about the environment, social impact, and the governance of companies, but they may disagree on the best approach. This makes values-based investing very individualized and creates a need for many different products and ideologies to serve all investors.

How can advisors get started in values-based investing, and how does a down market affect this strategy?

The easiest way to get started is through mutual funds and ETFs. Read about the investment style of the fund or strategy and determine whether it matches your values. There are also third-party screening services that evaluate your funds or individual investments.

It's been reported that "socially conscious" equity funds have struggled a bit more than the market this year — primarily due to these funds favoring growth stocks, especially tech stocks. That's why, as with any investment strategy, it's important to consider how diversified a fund or strategy is prior to investing — and to ask how the fund or strategy manages for downside risk.

Are there any tax implications with values-based investing?

There are always tax implications with changing investments, but there are lots of opportunities to take losses in portfolios with the recent market decline. This makes changing investments or investment managers easier from a tax standpoint right now. 

For example, if an investor wanted to change his or her existing diversified portfolio to a values-based investment strategy, there's a good chance many of their portfolio holdings will have unrealized losses (assuming they were held prior to the start of the year) that could be realized through selling those positions as they switch to a values-based investment strategy. 

The taxes from assets generated by selling investments at a loss can be used to offset taxes from other investments sold with capital gains. Also, they can be carried forward indefinitely to offset taxes in future years, if they more than offset any gains realized in the current tax year.