Values-Based Investing: How Investors Align Capital With Principle

Every investment already carries a view

There is no values-free portfolio. Money committed to one company is money not committed to another, so every allocation is already a judgment about which people, products and institutions deserve to grow. As Sebastian J. Harris, Sandbox's founding partner, writes in Foundations, "Every investment is therefore an expression of judgment about what deserves to exist." Values-based investing is what happens when an investor stops leaving that judgment implicit.

That is why the subject matters to us at Sandbox. Before we ask which vehicle fits a deal, we ask what capabilities societies will require in order to flourish over the coming decades. Values-based investing asks a version of the same question, in the investor's own words.

This piece is for anyone thinking about capital this way. Sandbox's funds are available only to qualified purchasers who are accredited investors.

What values-based investing means

Values-based investing means deciding in advance what your capital must respect, then applying that to real decisions. The standard comes from the person or institution whose money it is. A rating agency, index provider or fund label can inform it but doesn't set it. Two investors can use the same words and hold very different portfolios, because each answered the hard questions differently.

The words themselves carry no legal definition. SEC examination staff have pointed out that terms like "socially responsible investing," "sustainable," "ethical" and "impact" are not defined in the federal statutes that govern advisers and funds [1]. The precision has to come from what the investor writes down.

How it differs from ESG ratings and simple screens

An ESG rating starts with someone else's judgment. A provider weighs company data by its own method and hands back a score. That covers far more companies than any investor could examine alone. The price is that the weighting reflects the provider's priorities, so a score can move for reasons the investor never cared about. Examination staff have noted that loose ESG terms "can create confusion among investors" when advisers don't say how they define them [1].

An exclusion list alone has the opposite profile. It is cheap to state and easy to audit afterward. But it only says what a portfolio won't hold. It says nothing about the conduct of what's left.

Purpose and performance: how we think about it

The question every investor in this space eventually asks: does acting on principle cost money?

In Foundations, Seb argues that returns are indispensable, because without them capital cannot keep compounding and no institution lasts. He also treats performance as the test of whether the judgment behind an investment was sound, and as one aim among several. So in our view, purpose sets the question and performance shows whether it was answered well.

That is a conviction about how to think, not a claim about results. This article makes no claim that values alignment improves returns, and the costs are real:

• A smaller pool. Every principle rules some opportunities out. A narrower set can concentrate a portfolio by sector, region or manager.
• More work. Someone has to check, case by case, that the principle is actually being followed, and that takes time and money.
• Judgment can be wrong. A view about what deserves to exist is still a forecast. Some companies built for good reasons fail, and the investors lose money with them.

Foundations is also careful about scope. Seb writes that this way of thinking does not turn investors into social planners or point markets toward political ends. It only recognizes that capital shapes what gets built, whether or not the allocator admits it.

Purposeful investing: from exclusion to intent

Purposeful investing is the affirmative half: what the capital is meant to do. It needs a clear link between a specific investment and the stated purpose, written down when the decision is made. That is harder than exclusion, and it fails more visibly. SEC staff found client preferences for certain industries that had not actually been put into practice "because of challenges with implementation and monitoring, despite contrary marketing claims" [1].

Private foundations have a tax angle too. IRS Notice 2015-62 says foundation managers acting with ordinary business care and prudence may weigh "the relationship between a particular investment and the foundation's charitable purposes" [2].

The tools investors actually use

Four tools do most of the work. Investors usually stack them, and each one adds cost.

Negative screens

Leaving out companies with characteristics the investor won't own. The common failure is follow-through: SEC staff found advisers without adequate controls over clients' exclusions, especially where the instructions were vague or inconsistent [1].

Positive selection

Choosing companies for the qualities the investor wants to support [1]. The burden moves from keeping a blocklist to proving each inclusion, which means diligence on every position and a record of why it qualified. It is slower, and it is where stated process and actual portfolio most often drift apart.

Engagement

In public markets, influence runs partly through proxy voting and shareholder proposals, which Exchange Act Rule 14a-8 governs [3]. It is slow, no single holder controls the outcome, and policy has to match practice. Staff have recorded gaps between advisers' public proxy-voting claims and what they actually did [1].

Reporting

What gets reported gets managed. In the United States, much of that reporting is negotiated rather than prescribed. The SEC withdrew its proposed rule requiring more ESG disclosure from advisers and funds, effective June 17, 2025 [4].

Aligning capital with principle: the mandate does the work

Aligning capital with principle only becomes real in a binding document: an investment policy statement, an advisory agreement, a fund's governing documents or a side letter. Good language settles which exclusions apply and at what threshold, whether they reach through pooled vehicles, who decides close calls, what happens when a holding stops complying after purchase, and how often reports arrive.

Precision has a price. Each constraint narrows the managers and vehicles that can accept the mandate and raises the cost of monitoring it. Private vehicles also have eligibility rules that apply regardless of values, such as qualified purchaser status.

Fund names are policed differently by structure. The amended Names Rule requires registered funds whose names suggest a focus, ESG included, to adopt a policy of investing at least 80 percent of assets in line with that name [5], with compliance dates of June 11, 2026 for larger fund groups and December 11, 2026 for smaller ones [6]. It reaches registered investment companies [5], not private funds, so a private fund's governing documents carry the whole weight.

How values show up in private markets

In private credit and other private strategies, values work through relationships more than through filters. Four things change.

• The influence comes early. There is no proxy vote. Principles get expressed while terms are still being set: in fund documents, a side letter, or the mandate of a separate account.
• Diligence replaces filtering. The question is asked about a specific company and its founders before money moves. That is more specific than screening an index, but it depends on information the manager holds.
• Outside data is thin. Outside ratings rarely reach private companies, so the investor relies on the manager and should agree before closing on what will be reported.
• You can't simply sell. Committed capital is locked up for the life of the vehicle. If an investor later finds a mismatch, the remedies, such as excuse rights, have to exist from the start, and the access route chosen decides which are available.

This is the part we find most interesting. In a private deal, the investor and the founder sit at the same table before the terms exist. That is where values get tested: in what each side asks for and agrees to.

What we ask of capital

Foundations asks what kind of people an institution produces, and whether it leaves stronger capabilities than it inherited. We think capital deserves the same scrutiny. Did the companies and founders it backed become more capable? Did the returns confirm the judgment behind them? Values-based investing, done honestly, means asking those questions on purpose, writing down the answers, and accepting the costs that come with them.

Frequently asked questions

Is values-based investing the same as ESG investing?

No. ESG usually means a set of factors, often applied through third-party scores. Values-based investing takes the investor's own principles as the standard. The two overlap in practice; the difference is who defines the test.

Does values alignment help or hurt investment results?

We don't make a claim either way, and this article cites no evidence that settles it. What is clear is the cost side: principles narrow the opportunity set and add monitoring work. Our own view is that returns are the test of whether judgment was sound, which is why we don't treat purpose and performance as opposites. We hold that as a way of thinking. It promises nothing about outcomes.

How is a values commitment made enforceable?

By putting it in a binding document with a testable definition, a named person who decides close calls, and a stated remedy. "No harmful industries" is hard to test. A specific category with a threshold and a named data source can be checked.

What happens when a holding stops complying after it was acquired?

Good mandates decide this in advance, usually through a window to sell, a grandfathering clause, or an excuse right for future commitments. In illiquid vehicles the answer has to be in the contract, because there is no market to exit on demand.

Who verifies that a manager did what it said?

Mostly the investor, through reporting agreed in advance and their own review. The SEC's examination program covers registered advisers and funds, and its published findings record repeated gaps between stated ESG processes and actual practice [1].

Sources

1. [1] U.S. Securities and Exchange Commission, Division of Examinations — The Division of Examinations' Review of ESG Investing (Risk Alert, 9 April 2021). https://www.sec.gov/files/esg-risk-alert.pdf. Accessed 2026-08-12.
2. [2] Internal Revenue Service — Notice 2015-62, Investments Made for Charitable Purposes. https://www.irs.gov/pub/irs-drop/n-15-62.pdf. Accessed 2026-08-12.
3. [3] U.S. Securities and Exchange Commission — SEC Adopts Amendments to Modernize Shareholder Proposal Rule (Press Release 2020-220, 23 September 2020). https://www.sec.gov/newsroom/press-releases/2020-220. Accessed 2026-08-12.
4. [4] U.S. Securities and Exchange Commission — Withdrawal of Proposed Regulatory Actions (Release No. 33-11377). https://www.sec.gov/files/rules/final/2025/33-11377.pdf. Accessed 2026-08-12.
5. [5] U.S. Securities and Exchange Commission — SEC Adopts Rule Enhancements to Prevent Misleading or Deceptive Investment Fund Names (Press Release 2023-188, 20 September 2023). https://www.sec.gov/newsroom/press-releases/2023-188. Accessed 2026-08-12.
6. [6] U.S. Securities and Exchange Commission — SEC Extends Compliance Dates for Amendments to Investment Company Names Rule (Press Release 2025-54, 14 March 2025). https://www.sec.gov/newsroom/press-releases/2025-54. Accessed 2026-08-12.