Responsible investing involves incorporating environmental, social and governance factors — known as ESG factors — into investment decisions. Socially responsible investors choose to put their money in socially responsible companies with ethical values in line with their own.
For example, you might be concerned that fossil fuels are damaging the Earth’s environment. To avoid supporting companies that conflict with your values, you could invest in socially responsible mutual funds or companies engaged in environmental sustainability as a part of your investment strategy.
Is Socially Responsible Investing a Good Option?
Although SRI might not be for everyone, the fact remains that it’s a growing opportunity for investors. With a track record of financial success and options to suit almost any type of investor, there are many good reasons to consider sustainable investing as an investment option. Here are five reasons you should make socially responsible investments:
1. Plenty of Options Exist
From 2014 to 2016, socially responsible investments grew by 33 percent, to $8.72 trillion. Booming growth fuels competition, which always creates opportunities for investors. No matter what your personal cause is, you’re likely to find an investment that caters to your wishes.
According to the Forum for Sustainable and Responsible Investment, there are at least 202 mutual funds and exchange-traded funds in the ESG investing world. Just like more traditional investments, social impact investing includes all types and categories of choices, from high-yield investments to low-duration bond funds, from large-cap domestic stocks to global balanced funds.
2. It Can Be Profitable
When SRI began, there weren’t a lot of options, and the choices you had as an investor weren’t always the greatest in terms of performance. The good news is that socially responsible stocks have proven to be good investment opportunities over an extended period of time. The socially responsible Domini 400 index fund, for example, had an average annual return of 10.46 percent from 1990 to 2015, versus the 9.93 percent return of the Standard & Poor’s 500 index over the same period.
3. You Can Feel Good About Your Investments
It’s great to make money in the stock market. When your profits come from the work of companies that treat their workers poorly or pollute the atmosphere, however, it might give you pause.
Supporting companies that are in line with your personal beliefs can remove any guilt from earning profits and can help in another way: Not worrying about the companies you own makes you more likely to be a long-term investor.
4. You Can Tailor Your Investments
Although SRI is gaining popularity, ESG investments mean different things to different people. Professional investment management companies might offer separately managed accounts that can be run according to your specifications.
For example, your investment goals might not include supporting or investing in companies that produce guns, but casino companies might be acceptable to you. A good option could be a separately managed account that follows your wishes. Buying a generic SRI mutual fund, however, will most likely get you a portfolio that excludes any type of “vice” company, including those involved in gambling.
5. You Can Help the Company
Buying stock in the initial public offering or secondary stock offering of a socially responsible firm directly provides capital to the company, helping it to grow and prosper. Even when you buy stock in the secondary market — on the New York Stock Exchange, for example — you’re helping to keep the stock price high. A higher stock price allows the company to fund expansion by selling stock at higher prices.
When you buy bonds from a socially responsible firm, you’re directly lending it money. Your loan helps the company fund important projects, such as expanding to new markets, providing community investment or researching groundbreaking goods and services.