Core Values are the beliefs by which we strive to live. They are the priorities that we value most - such as family, meaningful work, or giving back to your community. I speak and write about Core Values frequently, because they serve as a guide and provide clarity as we face major life decisions.
More and more, I am hearing from clients and friends about a new Core Value—leaving the planet in better shape for the generations to come. Specifically, incorporating "sustainability" principles into the way we live and work.
What about the way we invest? Can we add sustainability into our portfolios? Let's first look at what sustainability means.
The United Nations describes sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”1
Dimensional Fund Advisors, one of our partners for equity portfolio management, manages sustainability mutual funds for U.S., International, and Emerging Markets stocks. Their approach, in typical Dimensional fashion, is based on science and research. Through a quantitative process, they score companies and industries in two broad areas, greenhouse gas emissions and social considerations. Let's look at each.
Greenhouse Gas Emissions
Dimensional works with leading climate scientists to understand the primary drivers of climate change—greenhouse gas emissions and potential emissions from fossil fuel reserves. Greenhouse gas emissions intensity is the largest component in their sustainability scoring system, though other environmental sustainability variables such as land use, biodiversity, and water management are also considered.
Social sustainability looks at issues deemed to have a negative impact on our society, such as tobacco, civilian firearms manufacturing, child labor practices and factory farming.
Based on scores from both categories, Dimensional then excludes or underweights stocks or industries with poor sustainability profiles, while emphasizing companies and sectors with better sustainability profiles. All while maintaining their traditional focus on broad diversification and pursuing higher expected returns through increased weighting to small cap stocks, cheaper value stocks, and companies with higher profitability.
The track records of Dimensional's Sustainability Funds show that investment performance does not have to be sacrificed in order to take a green approach.
Sustainability may not make every investor's checklist, but for those that care deeply, it's a conversation worth having. If it's one of your Core Values, then let's see how to integrate sustainability into your portfolio.
Please connect with me at sreiches@rrcapital to learn more.
Shari co-founded Rappaport Reiches Capital Management with one goal - to maximize the return on life for her clients. Please connect with Shari below. She loves to talk about investing, financial planning, and Barry Manilow.