Socially Responsible Investing: 3 Things to Know
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In today’s investing world, socially responsible investing (SRI) seems to be everywhere. While the modern practice of values-based investing dates back to the 60s—when the civil rights movement led to the establishment of community development banks in low-income and minority communities— it’s been gaining steam in recent years as investor demand climbs.
But if you’re new to the world of socially conscious investing, it can be daunting to know where to start. What exactly is socially responsible investing, and what do investors need to know before adding SRI funds to their portfolios? Here are three essential FAQs that every investor should read before they buy.
1. What is Socially Responsible Investing?
Socially responsible investing can be broadly defined as “any investment strategy which seeks to consider both financial return and social/environmental good to bring about social change.” Though the concept is easy enough to understand—choosing only to invest in companies that seek to benefit society—it can be a tricky practice to navigate in the real world.
For one thing, the concepts of ”social impact” and “financial gain” aren’t necessarily a match made in heaven. After all, not every values-driven company is a good investment.
There’s also the question of what makes a company “socially responsible.” According to Wikipedia, the general goal of a values-based investor is to support companies that “promote environmental stewardship, consumer protection, human rights, and racial or gender diversity.”
In fact, to a large degree, social responsibility is in the eye (or pocketbook) of the beholder; your values may be very different from those of a family member or friend. For example, you may choose to invest in companies that support clean water initiatives, while your neighbors may prefer to invest in faith-based funds.
Regardless of your values and the causes you support, it’s important to understand how values-based investing works so you can choose your strategy wisely. Let’s take a look at the main categories of socially responsible investing.
2. What Are the Different Types of Socially Responsible Investments?
Socially responsible investing typically falls into four main categories:
1) Environmental, social and governance (ESG)
ESG investing takes into consideration both financial and ethical concerns. Investors in ESGs typically value financial performance quite highly, but also factor in environmental, social, and governance issues when choosing their investments.
2) Socially responsible investing (SRI)
SRI can refer to either the overarching practice of socially responsible investing or one of its investing categories (see what we mean by tricky?).
SRI uses ESG factors to screen investments based on ethical and moral criteria. The criteria is subjective and depends entirely on the values of the investor. With SRI, the investor applies negative screens to filter out certain companies and funds. For example, an investor may apply negative screens to avoid investing in companies that manufacture products that are antithetical to her beliefs, such as tobacco or firearms.
Unlike ESG, SRI prioritizes ethics over financial performance. Though investors in SRI funds still want their investments to perform well, they tend to prioritize principles above profit.
3) Impact investing
Though still in its infancy as a strategy, many see impact investing as the key to a sustainable future. A subset of SRI, impact investing is the inverse of negative screening in that it applies positive screens to the process of investing instead of negative ones.
Also known as “sustainable,” “responsible,” and “thematic” investing, impact investing prioritizes positive outcomes over financial gain. According to Investopedia, “...[T]he objective of impact investing is to help a business or organization accomplish specific goals that are beneficial to society or the environment. Investing in a non-profit dedicated to the research and development of clean energy, regardless of whether success is guaranteed, is an example.”
4) Shareholder activism
Finally, shareholder activism is a form of socially responsible investing wherein a company’s shareholders (and therefore partial owners) use their influence and rights to change a company’s behavior in terms of social or environmental policies. Shareholders often employ a number of tactics to effect change, from filing resolutions, to publicizing their demands via the media, to threatening litigation if their efforts go unnoticed.
3. How Do You Choose Socially Responsible Investments?
If you decide to pursue socially responsible investing, you may find it helpful to start by making a list of what issues and causes matter most to you. (The UN’s list of sustainable goals is a good jumping off point.)
You may also want to review corporate governance and sustainability reports for the companies you’re already invested in to ensure that none of them violate your values. If you do discover you’re invested in companies or funds that don’t support your ethical concerns, you can always choose to divest.
Whatever cause you wish to support, there are plenty of mutual funds, private stocks, and exchange-traded funds (ETFs) that fit SRI criteria. You can choose to speak to a trusted financial advisor for advice on investments that match your interests, or you can seek out investment firms that cater to socially responsible investors. There are also a number of brokerages that offer SRI portfolio options.
Is Socially Responsible Investing Worth the Effort?
Regardless of the companies or funds you choose to invest in, you’re likely to feel good about the fact that you’re putting your money where your mouth is—even if some of your socially responsible investments don’t turn as much of a profit as investments you’ve chosen purely for financial gain.
Plus, there’s really no hard evidence showing that socially responsible investing hurts performance, according to Morningstar analyst David Katham. “In the long run, it probably evens out.”