Everything You Need to Know About Socially Responsible Investing

Everything You Need to Know About Socially Responsible Investing Are doing good and making money fundamentally at odds with one another?

Not necessarily, because socially responsible investing lets you do both.

Socially responsible investing has existed for a long time – researchers place its formal origin in the 18th century – but the current generations of socially conscious investors really brought it to mainstream popularity.

Still, many people view socially responsible investing as just a fad or a gimmick, but it’s actually much more than that – it is a tangible way to address social issues through the power of your portfolio and still make sensible investments while you’re at it.

Finally, we have a profitable alternative to tweeting against social justice and environmental violations!

Now let’s dive deeper and talk about all that you should know about socially responsible investing – what it is, why it makes sense and how to go about creating your own “do good” portfolio.

What Is Socially Responsible Investing

Socially responsible investing (SRI) is sometimes referred to as sustainable investing, responsible investing, impact investing, or ESG investing.

Broadly defined, it is an investing strategy in which you place your money with corporations that operate ethically, that actively minimize their negative impacts on the environment and the society at large, while advancing human rights and equal opportunities for all.

At a rudimentary level, this involves screening out certain industries (ex: alcohol, tobacco, fossil fuels, gambling, and firearms), and companies that operate in bad faith (ex: hiring child labor, knowingly pollute the ocean, etc) from your investment portfolio.

A far more sophisticated and nuanced approach is to consult the ESG metrics (which stands for Environmental, Social and Governance) to identify potential investment opportunities.

Each company gets an ESG score based on their adherence to these three criteria:

  • Environmental: The environmental criteria look at a company’s compliance with global and local environmental standards and regulations. It tracks how well a company conserves natural resources, reduces toxic emissions, limits wastefulness, disposes of hazardous waste, and treats animals.
  • Social: This tracks how a company manages relationships with their vendors, customers, employees and the communities it operates in. Do they work with suppliers that are also good corporate citizens? Do they ensure safe working conditions for their employees? Do they support local communities?
  • Governance: The governance metric addresses how transparent a company’s internal processes are. Do they cook their books or engage in corrupt or illegal practices? How transparent are their accounting methods? Are their executives fairly compensated (or more likely, over compensated)?

Sadly, no company gets a perfect score in every category. So it comes down to prioritizing companies whose social values and ideals most closely align with your own.

Why You Should Invest Responsibly

Investing responsibly is a reward in of itself, but here are a few other ways you could derive benefits from it:

You reward ethical companies: Investing capital into a company props up its valuation, which in turns fattens the pockets of shareholders. In doing so, you show that it pays to be socially responsible. In a world where money is considered speech, your invested dollars might be your strongest advocacy weapon.

You drive social change: Your money has a voice and it’s one you can put to use in making the world a better place. At the height of the Apartheid regime, it was the action of investors who drew their funds out of South Africa that helped force the government to abandon its racist policies. This goes to show the collective power of responsible investing.

You walk your talk: Anybody can go on a Facebook rant about why sweatshops shouldn’t exist and that the climate crisis deserves our focus and attention, but it’s another thing to commit to tackling those issues with the strength of your portfolio.

It’s less risky: Ethical concerns aside, companies that have a high ESG score are less likely to find themselves in massive scandals (like oil spills) that rock their stock prices.

You still make great returns: Although some feel that responsible investing comes at the great expense of profitability, that’s far from the case. Studies have shown that there’s generally no appreciable difference between the profitability of responsible investments and traditional investments.

How to Invest Responsibly

Now you might be wondering, this all sounds good and well, how do I start investing responsibly?

Don’t worry.

No matter what type of investor you are, there’s at least one responsible investing option that suits you.

Option #1: Invest With a Socially Responsible Robo-Advisor

Investing with a robo-advisor is perfect for beginner investors that want a hassle-free way to get into the market.

Robo-advisors are algorithm-powered, automated financial “advisors” that manages your investments on your behalf. In other words, they take most of the stress of responsible investing off you.

All you have to do is create a profile, answer a few questions about your investment goals and get matched with the right portfolio.

Here’s a short list of robo-advisors that offer at least one SRI-specific portfolio:  

  • Betterment
  • Wealthsimple
  • Personal Capital
  • Ellevest

Option #2: Invest in Socially Responsible ETFs

This is a great option for experienced investors who want to buy and hold a pre-screened basket of responsible stocks while avoiding the high management fees of mutual funds.

A quick recap on ETFs (exchange-traded funds): ETFs can be traded on stock exchanges like individual stocks but actually holds a collection of assets (similar to a mutual fund). They usually offer low expense ratios, and are rapidly gaining popularity because of it.

Below are some of the most popular socially responsible ETFs:

Of course, if you’re particularly passionate about a specific issue, chances are there’s an ETF built for that. For instance, ICLN (iShares Global Clean Energy ETF) only holds companies that are in the clean and renewable energy space, and CRBN (iShares MSCI ACWI Low Carbon Target ETF) seeks to reduce the carbon footprint.

For a complete list of socially responsible ETFs, please head on over to ETF.com.

Option #3: Invest in Socially Responsible Companies Directly

Buying individual stocks is ideal for expert-level investors who prefer to trade actively and have full control over their portfolios.

To find out how ethical a company is, head on to Yahoo Finance and type in the ticker symbol of any company that piques your interest in the search bar.

Tesla ESG Score

Under the “Sustainability” tab, you will find the ESG score of the company.

If you scroll further down the page, you can check if the company in question is involved in any activities that are questionable, such as gambling or adult entertainment.

Sustainability Product Involvement Areas

From there, you could make an informed decision about whether a company meets your moral standards and investing goals.

Onward and Forward

Making money shouldn’t come at the cost of your conscience. You can promote social goals that mean a lot to you and still earn great returns while you’re at it.

If upholding your social values and ideals matters a great deal to you, then socially responsible investing might be the most effective way for you to reward companies that strive to abide by higher ethical standards, and spur positive change.

It takes possibly the strongest incentive that any company has for acting – money, and uses it as a driver of socially responsible behavior.

The only real downside is that you may have to work a little harder to find investment products that match your values and objectives. But hey, that’s tolerable if you get to save the world in return.

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Category: InvestingMoney For Pros

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Article by: Flora Pang

Flora Pang aspires to become someone who plant trees in their spare time, write thank-you notes to strangers, and perform CPRs on unsuspecting elders. But until then, blogging about personal finance remains her only way of contributing to society. You can catch her rambling about money on Facebook, Twitter, Instagram, and (to a lesser extent) Pinterest.