Investment portfolios are personal. Your assets are tailored to your specific financial situation and investing goals.
For many people, investment choices go beyond those that make the most money. A growing number of investors are actively scouting for stocks and mutual funds for their moral stance on any number of issues, from the environmental to humanitarian causes.
Socially responsible investing, also called SRI investing, is a trend that seems here to stay. The number of investors who turned to responsible investing for at least a quarter of their portfolios increased to 75% in 2019 from 48% in 2017, according to Deloitte. Meanwhile, more companies are making an effort to show that they are socially conscious in a variety of ways.
However, as wholesome as it sounds, there are both pros and cons to consider when you take a socially responsible approach to investing.
What does Socially Responsible Investing Mean?
When you invest in a socially responsible way, it means your money is backing a company producing goods or services or practicing corporate policies that better society.
Socially responsible investors avoid investment choices in companies that they believe harm society. Some choose not to invest in companies with practices that threaten the environment or human health.
For example, a socially responsible investor may avoid investing in the stocks of cigarette companies for the reason that cigarettes have been linked to a higher risk of cancer. Or, they may avoid companies associated with alcohol, fast food or gambling, to name a few.
Instead, socially responsible investors favor companies that give back to society and improves human life. The term ESG stands for Environmental, Social and Corporate Governance. You can choose companies to include in your portfolio based on their ESG scores, which firms like MSCI provide. ESG scores are based on the amount of risk a company assumes in environmental, social and corporate governance areas.
A company’s financial statements can include more specifics about their ESG practices. Investors should see for themselves whether a company’s stated missions regarding ESG match their actual practices.
How do You Invest Money Ethically?
First, to invest money ethically, you need to be clear about which issues are important to you, whether they are political, environmental or another cause.
You can invest money ethically in several ways, from focusing on how a company treats its employees to how its practices impact the environment. Socially conscious investors tend to avoid companies that they view as supporting negative practices like gambling, pornography or fossil fuel production, to name a few.
Depending on the issue that is important to you, consider several socially responsible investing examples of ways to invest money ethically. Here are a few issues that socially conscious investor may prioritize:
1. The Environment
Green Investing is a form of socially responsible investing that favors companies that both benefit the environment and that do not have any corporate practices that harm the environment.
Sustainable investing can mean investors choose, for example, companies that invest more in energy conservation or technology that promotes higher air quality.
2. Political Issues
Investors from both sides of the political aisle can filter companies for their political stances so that their portfolio’s values align with their own.
Consult with a professional financial advisor who can help you match your investing goals with some socially responsible choices for your portfolio.
For example, during the Black Lives Matter movement, many public companies took a stance on the issue by donating to anti-racism causes. Among them were Nike (N) and GrubHub (GRUB).
Other investors may choose to invest in companies that have publicly held the same views on political topics like gun control, energy policies or abortion issues, to name a few.
3. Human and Fair Corporate Policies
Corporate practices can range from fair hiring to true transparency in communications.
For example, some companies may present detail information about their finances than others, and provide more background about their decision-making process. Or, some companies are very open about efforts to hire women or minorities, while others have been under fire for their practices here.
Investors may choose to put their money behind companies that seem to treat their employees fairly, with good health benefits and a healthy work environment.
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Upsides of Socially Responsible Investing
Socially responsible investing has a number of advantages. The primary benefit of investing with a moral compass is that your portfolio can align with your moral values.
By practicing green investing, or sustainable investing, your money could both be earning you money as well as contributing to a greater good.
Socially responsible portfolios can earn returns that are on par with portfolios that include
Many investors who practice investing in line with their values say the benefits of ESG companies are priceless.
Socially Responsible Investing’s Cons to Consider
Investing in a way that fits your morals is rewarding. However, these portfolios cannot take advantage of all opportunities if they screen for companies that support areas of concern to many people like gambling, tobacco consumption or alcohol use.
If a company doesn’t meet the investing threshold for socially responsible practices, it will be excluded even it if has the potential to earn significant gains.
Risks of ESG Investing including missing out on some gains that companies with lower ESG scores may have. Some analysts say that portfolios that focus heavily on socially responsible companies do tend to see lower returns than portfolios that are more inclusive.
Arguments against socially responsible investing include the fact that they are prone to underperform
Of course, there are also many examples of socially responsible portfolios actually outperforming the market.
Socially Responsible Mutual Funds
Investors have a growing number of assets choices to include in their portfolios, including a wide variety of socially responsible mutual funds.
Here are some of examples of ESG mutual funds:
- Fidelity U.S. Sustainability Index Fund (FITLX)
- Vanguard FTSE Social Index Fund Admiral Shares (VFTAX)
- Parnassus Endeavor Fund (PARWX)
- Pax Ellevate Global Women’s Leadership Fund (PXWIX)
- Calvert Bond Fund (CSIBX)
- Ave Maria Bond Fund (AVEFX)
- Calvery International Opportunities Fund (CIOAX)
Does Socially Responsible Investing Work?
Socially responsible investing can serve investors well by helping them keep their investment in line with their morals. It can also provide competitive returns that can help investors grow their wealth.
Of course, not all socially responsible investing strategies are the same. So, each portfolio that aligns with social goals may perform differently, with some underperforming the market and others achieving greater gains than the average market return.
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History of Socially Responsible Investing
Socially responsible investing has become increasingly popular in recent years, however it’s a strategy that has been around for quite a while.
Many analysts point to Kofi Anan as the initial driving force behind today’s high interest in socially responsible investing. In 1999, Anan delivered a speech at the United Nations Assembly in Davos, Switzerland, in which he called for a “human face” to the money-focused world of investing.
“I propose that you, the business leaders gathered in Davos, and we, the United Nations, initiate a global compact of shared values and principles, which will give a human face to the global market.
In recent years, the number of socially responsible mutual funds has been increasingly steadily as more people become interested in connecting their values to their portfolios.
Why is Socially Responsible Investing Important?
Socially responsible investing gives investors a way to both nurture their portfolio’s growth while staying true to their values.
Many people believe that money and morals are very separate goals, but socially responsible investing combines the two. When
Socially responsible investing returns can be on par or even above portfolios that include companies that don’t meet certain ESG standards. However, investors should be aware that they may have to be willing to compromise on some potential profits.
How to get into Socially Responsible Investing
Getting into socially responsible investing is easy. Sustainability investors invest in stocks the same way as any investor, by buying assets through an exchange platform or a broker.
You can buy stocks online through platforms like:
The first step is to identify your own financial goals and the social issues that are important to you. Then, review your investment choices to decide which companies may be good investment opportunities for you. You want to go for companies that match your values, but also ones that have good potential to earn high returns.
Reviewing a company for its investment and social value can be tricky if you’ve never done it before. So, consult a professional financial advisor to walk you through the details of designing your own portfolio. They can serve as a sounding board for helping you make your own investing decisions about which assets to buy for your portfolio.
The Bottom Line
There are a number of advantages and disadvantages of ethical investment to consider when building your own portfolio.
Investing in good causes feels good. It helps investors try to make a difference in their world, no matter which causes they favor.
Disadvantages of impact investment include the fact that you may miss out on some gains from companies that don’t have a strong socially responsible reputation. For many investors, that risk is worth the benefits of matching their portfolio to their moral values and contributing to social change.