What is Socially Responsible Investing?

Published by Bob Gustafson

What is Socially Responsible Investing?

Socially responsible investing (SRI) is an investment strategy that gives the individual options to allocate capital towards companies whose practices align with their personal beliefs and values, and exclude companies that are not congruent with their social, moral, environmental, political, and/or religious beliefs.

While the goal of most investment strategies is to achieve financial gain, this investment strategy uses additional criteria to achieve a second goal: social impact.

You can buy exchange-traded funds (ETF) or mutual funds that include companies you relate to in terms of your social, moral, environmental, and/or religious beliefs.

What Does a Socially Responsible Investment Portfolio Include?

There are different types of SRI funds that you can consider for your investment strategy.

  • Socially Responsible Investing Funds – These funds avoid companies that produce products that have varying levels of controversy such as firearms, gambling, tobacco, alcohol and possibly fossil fuel.
  • Environmental, Social and Governance Funds (ESG) – ESG funds tend to look at companies on both financial and non-financial criteria. The non-financial can be based on their quality of management, culture, risk profile and other value-based standards. These companies are usually leaders in their industry, better managed, forward-thinking and elevate corporate responsibility.
  • Social Impact Funds – Impact funds are investments made with the intention to generate positive, measurable social and environmental impact along with a financial return. These types of investments look at the impact on society first, and financial returns second.
  • Faith-based Funds – These funds only invest in stocks that follow the values of a specific religious denomination.

Work with your financial advisor to begin moving towards a socially responsible investing strategy. Document the types of investments you want to invest in and those to avoid. It takes research to ensure the investment not only meets your ethical criteria, but also one that contributes to the performance of your portfolio.

Pros and Cons of Socially Responsible Investing

There are benefits to employing a SRI strategy for your portfolio. You:

  • Support your values with your investments, taking a stand on social issues by withholding your money from businesses that are misbehaving.
  • Feel better about how your money is being invested by rewarding ethical companies.

But you also need to be careful when selecting this investment strategy.

  • You need to make sure that your portfolio still performs at the rate you need to achieve your financial goals. It’s not wise to focus solely on SRI stocks and funds while ignoring stronger investments that can get you to your goals more quickly.
  • You also need to be careful in selecting your investments. Just because a company says it is socially or ethically responsible, it doesn’t mean it is.
  • Socially responsible depends on your point of view. The idea of socially responsible investing is predicated on your beliefs and is not necessarily universal. A socially responsible company to one person might not be to another. For example, some may consider a CBD oil manufacturer as a socially responsible company. CBD oil has proven pain-relieving effects and it’s an opioid alternative. However, some individuals may not see the benefits. Or, these people can’t get past where the CBD originates. Therefore, they might disagree a CBD oil manufacturer is socially responsible.

Socially Responsible Investing Is Here To Stay

Today’s investors want to invest in companies that make socially responsible choices such as ensuring social justice, environmental sustainability and alternative energy/clean technology efforts.

Initially there was a lot of skepticism in a socially responsible investing strategy because:

  • There weren’t a lot of funds that focused in this space
  • They were typically more expensive
  • Their performance wasn’t as good as compared to non-socially responsible funds

But all indications point to this investment strategy continuing and becoming more prevalent because:

  • You can now expect reasonable returns from these investments
  • They are a cost effective investment option
  • There are many more now than when it first started
  • 401(k) plans now contain socially responsible funds. This was unheard of in the past
  • People with money to invest (especially millennials) want to support companies that try to do good for the people and the planet.

Despite the pros and cons, this trend is here to stay. If you are interested in becoming a socially responsible investor, speak with your financial advisor on how to shift your investment portfolio and what type of socially responsible companies you are interested in.

For more information on socially responsible investment, listen to our podcast.