6 Ways To Incorporate Social Responsibility Into Your Financial Plan, According to Experts
Written by
Jacob Wade
Edited by
Gary Dudak
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Investing is designed to grow your wealth, but it can also have an impact on others. Socially responsible investing (SRI) has emerged over the last decade as a way to create lasting positive impact while still getting a decent return.
You can also design your financial plan to include direct contributions to socially responsible nonprofit foundations, and to invest in businesses that make a difference. Here’s a few ways that experts recommend incorporating social responsibility into your financial plan.
Create an Investment Policy Statement (IPS)
Before you start investing in impact funds or choosing specific investments, it’s a good idea to sit down and create a vision for your investment plan.
“Create an investment policy statement that clearly articulates views on social issues and the investment implications,” said Rob Duncan, financial advisor at Global Impact Wealth Management. “Competent advisors will understand this process and will be able to guide the family or institution through this process.”
An IPS is best created under the guidance of a financial advisor, but you can also create your own to keep on hand and guide you as you build your investment portfolio.
Be Transparent With Your Family
While investing for impact is important, it is critical that you keep open communication with your family about your investing approach. Whether you are steering a family trust or simply investing for yourself, you need to talk through your desires on why you want to use your investments to make an impact.
“Families and institutions need to have conversations and dialogue with family members and stakeholders,” said Duncan. “They should articulate their positions and why they are taking the actions they are taking as it relates to portfolio construction, financial planning decisions, estate planning, or philanthropic endeavors. Particularly in families, poor communication amongst family members and across generations can be a point of friction and conflict. Proactive communication can have a positive influence on relationships and ultimately positively impact the desired social outcomes.”
Especially in a marriage, coming together on the big issues that are important to both of you can help you avoid arguments when you’re choosing how to invest.
Include Charitable Giving in Your Plan
Socially responsible financial planning typically includes charitable giving. Whether its personal giving or managing your estate, it’s a good idea to detail how your money should be used.
“As part of an estate plan, there are ways to both support causes that one is passionate about, while also providing for family,” said Duncan. “Consult with competent advisors and legal professionals who have experience in this area.”
Specific giving plans might include setting up your will to include giving a portion of your estate to charitable causes. It may also include setting a monthly budget to give now in addition to investing in sustainable and socially-responsible companies.
Create a Donor Advised Fund (DAF)
One approach to giving is using a donor advised fund (DAF). This can save on taxes and allows you to give more to causes you care about. There are some creative ways to fund these charitable giving vehicles, including donating investments.
“I work with millennials who have equity compensation,” said Josh Radman, financial advisor at Presidio Advisors, LLC. “Particularly given the hot market that we’ve seen over the past couple years, many folks are sitting on large unrealized gains from appreciated stock shares and wondering how to divest in a tax-efficient way. For those who are also charitably inclined and want to support their favorite causes, I often recommend that they contribute these highly appreciated shares to a donor advised fund.”
Using a DAF can help those with taxable gains avoid paying capital gains taxes and give a significant sum to causes they care about. Plus, there’s a tax deduction available at the same time. Radman added that there are a few benefits to contributing to a DAF:
- You avoid paying capital gains tax since you’re not selling the shares, but rather donating them in-kind.
- By not paying taxes, you also significantly increase the net amount available to the charity. As a tax-exempt organization, the charity then receives the full value of the contribution.
- You get to deduct the full fair market value of the contribution from your income.
Use Stock Screeners
When you want to invest in a company that aligns with your values, you can use a stock screen to find those companies.
“Screening positively (allocating in companies they feel represent their values) or negatively (excluding companies that have products and services they object to) allows investors to take proactive control regarding how they deploy their capital to publicly traded equities,” said Duncan.
Screening stocks might feel a bit overwhelming, however, and it can be a good idea to work with a licensed advisor that can help you sort through the investment choices. Because while investing in socially responsible companies is important, you also want to earn a decent return at the same time.
Invest in SRI/ESG Funds
There are specific funds that sort through stocks to find companies that align with specific values. These funds are tailored for socially conscious investors that want to make an impact, but don’t have the time or expertise to sort through stocks manually.
Socially responsible Investment (SRI) funds are focused on companies that promote equality, company ethics, fair governance and minimal environmental impact. These funds are structured to help promote socially responsible investing, but also to make a solid return.
Environmental, social, and governance (ESG) funds are similar to SRI funds, and only include companies that help make a positive impact on the environment, workplace equality and fair governance. These funds exclude companies that don’t prioritize these things, and help promote companies that do.
Ultimately, ESG and SRI funds own large and small companies, similar to other mutual funds. The impact they make is hard to measure unless you dive into each company and how they donate and manage their company. But it does encourage positive change in important areas, and these funds usually still provide a comparable return to others.
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