Socially Responsible Investing in 2020: How Can You Invest Responsibly?

Building your nest egg can also mean building a better world.

Socially responsible investing is an approach to investing that takes into consideration your personal views about how a company’s business practices might be affecting the rest of the world. It can take a wide variety of forms, given that people have a wide variety of views on what constitutes “socially responsible” behavior on the part of a corporation. At its core, however, the goal is to tie the power of the financial markets to positive forces in this world — harnessing capitalism to affect changes that will benefit more people than just those who are profiting financially.

While attitudes on Wall Street have long tended to eschew any effort to inject concepts of socially conscious investing, a new generation of socially responsible mutual funds and exchange-traded funds is putting that idea front and center. And, in many cases, it’s not even necessarily just about doing good. A new movement in investing is building around the theory that the greatest long-term benefit to shareholders is delivered by companies that are forging mutually beneficial relationships with their employees, their environment and their community.

So, here’s a closer look at the world of socially responsible investing and how you might be able to put your nest egg to work by helping you achieve your financial goals while making the world a better place.

Here’s an overview of what you’ll find in this guide to socially responsible investing:

What Is Socially Responsible Investing?

In its broadest interpretation, socially responsible investing — aka SRI — boils down to making investment decisions while using your conscience as your guide.

“Socially responsible investing has a much longer history than many realize,” said Robert Johnson, a Professor of Finance at the Heider College of Business in Creighton University. “Some trace it back to the 1750s when the Quakers prohibited members from participating in the slave trade. But, it really came into the consciousness of US-based investors in the 1970s when South African divestment in protest of the country’s Apartheid government became a cause célèbre for many interest groups.”

In today’s world, that could be deciding that you would feel unease about knowing that profits from tobacco companies or gun makers might help pay for your retirement. It might also be opting to commit a certain portion of your portfolio to local small businesses. The core concept is an effort to use investing not only to grow your savings but also to change the world in a positive way.

Clearly, that’s going to mean a lot of different things to a lot of different people. But there are certain approaches and strategies that you can learn, which should help you work out your own approach to SRI that will best serve both your financial and moral goals. In fact, a new cottage industry is building around offering investors more options that can combine their charitable goals with their financial ones.

Also See: 8 ETF Investing Strategies To Boost Your Portfolio

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Goals of Socially Responsible Investors

Everyone’s specific goals for SRI are likely to be unique, but understanding the various approaches you can use is important to developing a strategy that’s right for you.

  • Improving Returns: The immediate assumption by many people is that focusing on social responsibility will naturally mean that you will have to sacrifice some returns for your portfolio. But it’s important to note that some SRI strategies are actually based around the concept that socially-responsible companies will ultimately perform better over the long term. The idea being that corporations that develop a strong relationship with their workers, the surrounding community and the environment are fundamentally more sustainable and therefore, should ultimately produce better returns over time.
  • Cleaner Environment: Protecting the environment and reversing the effects of climate change are a major priority for many investors, and there are a variety of ways you can try to support those goals with your investments. It might mean focusing on investing in firms developing new technologies to help combat global warming, or avoiding investments in corporations with business models you see as actively damaging to the environment.
  • Social Justice: Social justice is another important goal you can try to address with SRI. Focusing on companies with more gender and racial diversity in their C-suite or on the board of directors — or the rest of their workforce. Or it might be about investing in companies that you see as being supporters of greater social justice through their work. Regardless, shifting cultural norms through business practices is a criterion many consider important.
  • Promoting Health: Public health concerns — at home and abroad — is another focal point you can use to guide your socially responsible investing. There are private companies developing important treatments for diseases that affect millions of people worldwide. Or you might just want to invest in firms with the best track record in terms of providing benefits to their employees. Similarly, you might also look to avoid any investments that can be seen as clearly detrimental to public health, like mining companies that are polluting local waterways or cigarette makers.
  • Promoting Peace: Frequently, the factors driving global and local conflicts can be rooted in poverty and economic problems. But invested capital and growth in key regions can help bolster the peace process and prevent the more violent elements of society from taking root. As such, some investment strategies are focused around finding opportunities that will play an important role in contributing to a prosperous, peaceful time in a particular country.
  • Promoting Morality: Clearly, there’s no clear, universal definition of what is and is not moral, but there are plenty of options that can provide a framework for your investing approach. You might see it as a matter of offering up a transparent and open corporate structure, or it could revolve around the effect of their products. Likewise, many people might rely on their faith to help guide their decisions.

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How Does Socially Responsible Investing Work?

You might approach SRI in one of two basic ways — either in choosing what to invest in or choosing what not to invest in.

“SRI takes two major forms — a positive or negative approach,” said Johnson. “The positive approach — a form of impact investing — is when investors buy securities (both stocks and bonds) of firms they perceive are helping achieve social good. An example would be solar power or wind power manufacturers to encourage less dependence on fossil fuels. The flip side of SRI is the negative approach — that is, declining to invest in companies one perceives as doing social harm. For many, this would involve foregoing investments in fossil fuel companies and gun manufacturers. Essentially, not investing in companies inconsistent with one’s values. And, here is where beauty is in the eye of the beholder.”

There’s considerable debate over which approach might be more effective and there’s no clear consensus that either or both is a better path to achieving a greater impact.

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What Are the Different Types of SRI Funds?

For some of you, all of this equivocating might be a little overwhelming. Most people have some ideas about what they care about, but putting it into terms that are actionable in investing isn’t so easy.

Fortunately, plenty of companies have now started to make it a priority to package funds and other consumer investment products that can allow the average investor to easily pick out a mutual fund that’s built around their goals for social responsibility. So, here’s a look at some of the most common strategies and approaches you might see used by the various funds with an SRI goal.

ESG Funds

One of the most popular types of SRI falls under what’s become known as ESG investing, for environmental, social and governance — the gist being that those three categories are each important factors to a company’s ability to sustainably remain in business.

What’s more, many ESG funds are rooted in the idea that companies that are good stewards of the environment, have a mutually beneficial relationship with the stakeholders — inside and outside the company — and have a boardroom that’s transparent and represents a variety of interests will actually be better investments over the long term.

“The latest incarnation of SRI is ESG (Environmental, Social and Governance) investing,” says Johnson. “This is simply a form of SRI investing that positively screens for companies that score high on those three criteria. ESG investing is becoming increasingly popular and is pressuring firms to change practices to score higher on ESG criteria.”

The growing interest in ESG from the general public does appear to be having some impact on the financial industry, due in no small part to the idea that it’s positioning itself not just as a way to promote social good but as a better way to improve your returns over time.

Check Out: 25 Investments That Make You Feel Good While You Make Money

Impact Funds

Whereas ESG funds are more focused around creating a new, more holistic perspective on which to judge your investments, impact funds are more specifically built around putting your money to work at creating social good. In this approach, sacrificing some of your potential returns in favor of better outcomes around the social aspects of the fund’s goals is going to be much more common as the focus is more on creating the largest impact possible for every invested dollar.

Faith-based Funds

As observed above, faith is likely to be a central factor to how many people view the largest moral imperatives facing society, so it would make sense that turning to your church for guidance on SRI could help find a path that suits you.

Fortunately, there are often options for investment funds that have taken their cues directly from religious institutions. Many churches have their own investments and are transparent about the criteria they use to select options that suit their doctrine.

Mutual funds specifically designed for Catholics, Muslims and a variety of other religious affiliations are available. So you can often find a fund that will be specifically tailored toward a specific sense of morality you adhere to.

Read: Understanding EFTs and How They Work

List of SRI Funds To Consider

If you’re interested in seeing a little bit more about some of the options available to you, the Forum for Sustainable and Responsible Investing has produced a comprehensive database of mutual funds and ETFs offered by their members. Alongside the funds, there’s financial data from Bloomberg as well as information about the makeup of the funds.

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The Pros and Cons of Socially Responsible Investing

Unfortunately, SRI isn’t exactly a chance to have your cake and eat it, too. While there can be a wide variety of benefits, there are certainly some downsides you need to consider before deciding if this approach is right for you.

Pros

The biggest question at hand is whether or not you should expect to get lower returns on your investments if you decide to add SRI factors to your investment strategy. The common assumption might be that letting a focus on hippy-dippy ideas about treating others well will take away from a ruthless focus on the bottom line, ultimately leading you to invest in companies that won’t be as competitive.

A growing body of evidence appears to not only be refuting that perspective but also suggesting that the exact opposite may be true. Studies from various players in and around the financial world have shown that various approaches to SRI actually produce stronger returns than those that don’t make any attempt to factor in the firm’s effect on society. It doesn’t yet represent a consensus, but it does at least bolster the idea that SRI doesn’t have to mean compromising your financial goals in the process.

What’s more, the psychological effects on investors should be important to consider. If knowing that your portfolio is balanced to reflect your personal values, it might make you that much more eager to save and invest more. If nothing else, tricking yourself into putting away more and more money by sticking to investments you genuinely believe in is a great way to keep growing that nest egg.

And, of course, you can’t put a price on feeling confident that you’re doing something to improve the world around you. It helps build the idea that your investment doesn’t have to just be about you and your retirement, but rather can serve that purpose even as it’s contributing to a better future.

Cons

But, it would also be a mistake to assume that simply opting for SRI is the right choice for anyone. There are some clear downsides that might make some investors prefer to stick to a more traditional approach.

For starters, practicing SRI investing is probably going to require a bit more work on your part. Even if you’re just researching the best ESG funds, it’s still likely going to be a bigger lift than you should expect when you’re not looking to add this additional focus to how you’re building your portfolio.

And if you have a lot of specific ideas about just how you want to execute your SRI? Well, you’re likely going to end up spending a lot of time sifting through studies and research about how various industries affect the environment or treat their labor unions.

Not to mention, SRI investing makes it hard to use some of the most basic low-cost ETFs or index funds non options. The S&P 500 isn’t screened based on SRI considerations, so a fund that tracks that index — among the most valuable tools at any investors’ disposal — might not meet your standards.

There’s also the question of just how effective SRI is at accomplishing its stated goals. While it’s relatively easy to track how the performance of SRI funds compares to a benchmark index or other mutual funds, quantifying how much “good” they’re actually doing by focusing investment with them isn’t so easy to quantify.

And, if you’re paying a higher fee or getting lower returns because of an SRI approach, you’re likely going to want to have a real sense it’s worth it.

Also Learn: Difference Between EFT vs. Mutual Funds

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Socially Responsible Investing: Saving for Your Future and Everyone Else’s

For many people, adding a layer of additional complexity to the investing process is unnecessary. And if it’s not for you, sticking to the tried and true investing strategies should certainly help you grow your savings into the sort of nest egg that could support a college education for a kid or a comfortable retirement.

But, if you are interested in putting your money to work — not just growing your wealth but improving the world — there’s a lot of ways you can pursue that goal. And it doesn’t even have to mean that you’re going to sacrifice any of your financial goals in the process.

So, if making SRI a part of your financial plans is something you’re interested in, do some more research about the options available to you. If you have a financial advisor, ask about options for meeting your goals. Also, consider asking the HR department at your workplace what it’s doing to ensure there are good SRI and ESG options available in your 401(k) plan.

Keep Reading: Ways Investing Will Change in the Next 25 Years

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About the Author

Joel Anderson is a business and finance writer with over a decade of experience writing about the wide world of finance. Based in Los Angeles, he specializes in writing about the financial markets, stocks, macroeconomic concepts and focuses on helping make complex financial concepts digestible for the retail investor.