Want to make sure your money supports your values? That’s where socially responsible investing comes in.
Socially responsible investing (SRI) is often interpreted as “tree hugging” or giving up investment returns for the sake of doing good. (This isn’t quite true, by the way). And even when Grownups are interested in the concept of investing in a socially responsible way, many don’t even know how to get started or what it actually means.
So, What is Socially Responsible Investing?
Socially responsible investing (or sustainable and responsible investing) goes beyond monetary returns: It’s a way for Grownup investors to make a positive impact with their money locally and globally. Socially responsible investing takes a Grownup’s societal concerns into account as an important part of their investment focus.
The History of Socially Responsible Investing
Socially responsible investing isn’t a new concept: It dates back more than 200 years, originating with the Methodists and Quakers. Both groups preached against the idea of profiting at the expense of their neighbors. In other words, no partnering or investing with those who earned their money though alcohol, tobacco, weapons, gambling, or slavery.
In the modern era, the real power of boycotting companies and divestment from companies associated with harmful products or practices became evident from the 1960s through the 1980s:
- Companies providing weapons used in the Vietnam War were boycotted.
- Community development banks were established in low-income or minority communities as part of the Civil Rights Movement.
- Investors (both individuals and institutions) divested from companies that operated in South Africa, which contributed to the collapse of apartheid.
- New mutual funds purposefully avoided companies that produced weapons, alcohol, tobacco, and nuclear energy.
3 Ways Socially Responsible Investing Works
The most straightforward: When you actually invest in companies or governments that align with your values, you’re fitting the definition of a socially responsible investor.
Maybe the environment is an important issue to you. Or perhaps it’s social issues like employees’ rights or human rights in general. Maybe you’re concerned with corporate accountability. While you can research specific companies, investing with your values is most easily accomplished through mutual funds, index mutual funds, or ETFs whose focus is on SRI goals.
When mutual fund companies are screening companies to include in their SRI mutual funds, they use environmental, social, and governance criteria (ESG) to address their concerns. This means that they will include (or exclude) companies based on factors including environmental impact policies; community/workplace health, safety, and human rights policies; and corporate transparency and accountability.
Companies may be included because they satisfy certain requirements such as “green” energy. They may be negatively screened out because they are involved in a certain industry such as fossil fuels. Mostly, though, companies are included based on restricted screens, which means they may satisfy most of the portfolio manager’s criteria, but not all. This can be a great opportunity to create a dialogue with a company to encourage them to improve on their ESG practices.
- Shareholder Advocacy
Mutual fund companies can encourage better ESG practices through shareholder advocacy on behalf of investors—since individuals don’t typically own enough shares to have a strong enough voice. Advocacy is typically a dialogue with board members, filing resolutions for shareholders’ votes, educating the public, and running public relations and/or media campaigns. Ultimately, the goal is to pressure companies into improving their practices and policies.
- Community Investing
Just like the community development banks of the 1960s, investing in local and underserved communities is still a powerful way to make an impact with your money. With community or impact investing, your money is directed to those communities, in the U.S. and abroad, which are underserved by more traditional banks. Funds then give access to low-interest loans not just for small businesses, but also provide valuable community services including health care, housing, education, and child care. While people can invest directly through a community development financial institution (CDFI), this is also easily done through a mutual fund.
The Bottom Line on SRI Returns
Today, SRI mutual funds are pretty competitive with traditional ones: Not only do SRI funds undergo the ESG screening process, they also go through the same rigorous financial analysis that all mutual funds do. As such, many find that SRI roster companies are strong with sound business practices. Plus, socially responsible investing is becoming more popular as well. Today there are more than 900 investment funds that use ESG screening criteria.
Where to Invest
The easiest place to start is with mutual funds from companies that specialize in SRI, such as Calvert, Parnassus, and Pax World. These companies offer a variety of index and actively managed mutual funds. Many more mainstream companies offer some SRI focused funds, such as index funds from Vanguard and TIAA-CREF and actively managed funds from Neuberger Berman and Dreyfus.
If you are interested in researching SRI mutual funds, The Forum for Sustainable and Responsible Investment offers comprehensive listing and screening criteria of mutual funds. Morningstar offers financial ratings of mutual funds, plus soon will offer ESG ratings as well. If you aren’t comfortable doing this yourself, you may want to get help from an investment advisor.
Since most people start investing through their 401k and 403b plans at work, this could be a good place to get started. If your employer doesn’t offer SRI funds, you can request that they do so. Brokerage firms will offer the most choice in SRI funds, so if you are planning to open a traditional IRA, a Roth IRA, or even a taxable investment account, this is another great avenue to get started.
Investing in a socially responsible or sustainable way does take some homework on your part. It does take some research, and you may need the help of a financial or investment advisor. Think through what really matters to you in terms of where you invest your money, and you’ll find a way to invest that satisfies your values.
Rachel is a CERTIFIED FINANCIAL PLANNER™ who believes that financial planning can be a positive and powerful tool for changing lives.