What Is Socially Responsible Investing? How to Get Started

Socially responsible investing means filling your investment portfolio with companies that align with your social values. Learn how it works.
By Anna Baluch

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Whether you’re new to investing or have been doing it for years, you may want to consider socially responsible investing or SRI. This is particularly true if you’re looking for a way to give back and make a positive difference in the world.

Take a closer look at what SRI is and how it works so you can decide if it’s right for you.

What Is Socially Responsible Investing?

SRI is an investment strategy that considers both social change and financial returns. Also known as sustainable investing, value-based investing, and ethical investing, SRI can give you the opportunity to support companies that align with your values.

Investors who pursue SRI look to own shares of profitable, transparent companies that prioritize the environment, human rights, community involvement, and other activities that support people and our planet. They may also purposely avoid companies in industries that they consider questionable or unethical.

Why Socially Responsible Investing?

Every socially responsible investor has their own unique goals. One might prefer green companies that work towards a cleaner environment and reduce the carbon footprint of their products and services. Another investor may steer away from businesses in countries that violate human rights.

There are also many health-conscious investors who actively refrain from investing in companies that sell alcohol or tobacco. In addition, some investors strive to promote morality and forgo firms in industries like gambling and pornography. You can customize your SRI strategy to fit exactly what you do and don’t believe in.

In addition to its benefits to investors, SRI can help companies gain access to capital so they can grow and fund their corporate social responsibility programs. It may also encourage firms to prioritize ethics and improve the way they operate with their employees, customers, and shareholders.

Learn more about some of the top investing apps and how you can put them to work for you.

How Does SRI Work?

Socially responsible investors can choose from a wide variety of investments. The most common types include:

Mutual funds and ETFs

There is no shortage of mutual funds that are considered socially responsible. If you go to The Forum for Sustainable and Responsible Investment, you’ll find a handy list of hundreds of socially responsible mutual funds and ETFs.

Community investments

As a socially responsible investor, you can also lend your money to community organizations. To do so, you may put funds into community development financial institutions (CDFIs), such as banks, credit unions, and loan funds, which offer financial services in low-income areas. To find CDFI banks, visit the National Community Investment Fund (NCIF).

Microloans

Microloans are small loans you may make directly to startups. They offer another way to invest your money in a socially responsible way. The most popular microloan organizations you may want to consider include Kiva and Zidisha. Both of them specialize in microloans to entrepreneurs in underdeveloped countries.

It’s important to note that socially responsible investors are not charitable investors. Most of them still want to make a profit and maximize returns. However, their goal is to do so without going against their ethics and values.

What Is ESG?

ESG is an acronym for environmental, social, and governance. These are the three factors that socially responsible investors measure when they assess the sustainability and ethical impact of investing in a certain company. Oftentimes, these investors use ESG criteria to evaluate investments. Here’s a brief overview of what each word in ESG entails.

Environmental

Environmental criteria may cover a company’s waste management program, the way they use renewable energy sources, and how they handle potential air and water pollution. It may also relate to their stance on raw material sourcing, climate change, deforestation, and animal welfare.

Social

Social criteria can include a variety of social issues, many of which deal with relationships. It’s often tied to customer satisfaction, data security, employee gender and diversity, turnover, fair labor practices, and human rights at home and abroad.

Governance

Governance refers to how a company and its employees, shareholders, and customers are treated and managed by its executives and board of directors. It also pertains to executive compensation, internal corruption, political contributions, and lobbying.

ESG and SRI: What’s the Difference?

While the terms ESG and SRI often get used interchangeably, there are differences between them. ESG is similar to SRI in that it considers the social and environmental impact of a specific investment. However, it also looks at how a company’s compliance (or lack thereof) to these standards may play a role in its financial performance.

In addition, SRI investing excludes certain investments or selects them based on ethical guidelines. It uses ESG factors to screen investments negatively and positively. For example, an investor may avoid mutual funds that come from companies that sell drugs and alcohol.

ESG investing is most concerned with environmental, social, and governance factors while SRI refers to when investors avoid certain investment opportunities.

Why Do Investors Like ESG?

Most investors are firm believers in ESG because it allows them to feel good about the companies they invest in. They don’t have to allocate their funds towards a company whose values contradict their own.

Many ESG investors believe that they are taking steps toward a more sustainable future for themselves and the people around them. With ESG, they can align their finances with their values.

While ESG is often referred to as a “feel-good investment strategy,” it can also lead to high returns, making it appealing to many investors. Some financial experts believe that ESG investments may outperform traditional investments over a long period of time. Keep in mind, however, that ESG hasn’t been around for a long time so there’s not a lot of evidence on how it affects performance.

Pros and Cons of SRI and ESG Investing

Just like all financial strategies, SRI and ESG investing come with benefits and drawbacks including:

Pros

  • Shape the world: SRI and ESG may become catalysts for change, especially as they become more popular. By participating in them, you can encourage companies to engage in socially responsible practices.

  • Rewarding: It can be exciting to watch your investments succeed. What’s even better, however, is when you know your portfolio is made up of ethical companies you support.

  • May enjoy better returns: There are many studies from various financial experts that show SRI and ESG may actually lead to stronger returns. This means you don’t necessarily have to compromise your financial goals when you build a portfolio that reflects your values.

 

Cons

  • No guarantee: SRI and ESG are not risk-free investment strategies. This means you may or may not end up with positive financial returns. There is a chance you’ll sacrifice financial gains for ethics.

  • Can be difficult: Compared to traditional investing, SRI and ESG investing are more involved. Since they’re not passive strategies, you’ll have to do your research and figure out which investments you do and do not want to pursue.

  • Subjectivity: What constitutes as socially responsible may be different for you than for someone else. Investing with SRI and ESG in mind is highly subjective and ambiguous. It all depends on your unique views and perspective.

Getting Started With ESG Investing

If you want to become a socially responsible investor, follow these tips to start and build an ESG and SRI portfolio.

Clarify your values

First and foremost, think about what values are important to you. Maybe you care about environmental sustainability or human rights. Or perhaps you hope to support companies that prioritize gender equality or diversity.

By taking the time to clearly define your values, you’ll find it much easier to choose the right investments.

Determine a portfolio allocation

Ask yourself how much of your portfolio you’d like to allocate toward ESG and SRI. You might be set on only investing in ESG companies. In this case, they’ll be 100% of your portfolio. Or, you may prefer to use ESG and SRI as a way to diversify your existing portfolio and make them 10% or 15% of it.

Choose your investments

You’ll need to pick specific ESG investments. These may be mutual funds, ETFs, or individual stocks, for example. You may want to stick to a certain time of investment or mix things off and incorporate a combination of them. We’ve included a list of good options below to get you up and running.

Consider a robo advisor or financial advisor

One of the easiest ways to ensure the funds you invest in meet your criteria is through a robo advisor. A robo advisor can manage and invest money on your behalf, based on your risk tolerance. Since there are plenty of robo advisors on the market, shop around and find one that focuses on or promotes ESG and SRI.

If you prefer to work with a human to support your socially responsible investing efforts, reach out to a local or online brokerage to find a reputable financial advisor.

ESG Funds Worth a Look

Instead of individual stocks, ESG funds are a grouping of stocks. When you buy a fund rather than a single stock, you’ll reduce your risk. This is because a fund will hold the shares of many companies, not just one.

In the event a company in your fund goes out of business, for example, the fund should perform better than if you owned stock in the individual company. Several examples of ESG funds you may want to add to your portfolio include:

  • Parnassus Endeavor Investor (PARWX): The PARWX focuses on companies that offer positive work environments for their employees. It supports the well-being of employees and looks for “undervalued companies.” PARWX refrains from organizations that are involved in industries like alcohol, tobacco, gambling, and fossil fuels.

  • Vanguard FTSE Social Index I (VFTNX): This fund avoids any companies that produce or sell alcohol and tobacco. It also refrains from nuclear power firms and those that sell to the military community. VFTNX prioritizes diversity in the workplace and looks for at least one woman on the board of directors as well as zero human rights violations.

  • Thornburg Better World International Fund (TBWIX): The Thornburg Better World International Fund focuses on companies with sustainable business models that could or have already made a positive difference in the world. Its top holdings include Kanzhun Ltd. and Tencent Holdings Ltd.

  • iShares ESG MSCI USA ETF: The iShares ESG MSCI USA ETF revolves around companies that have a high intangible value assessment (IVA), which analyzes a firm’s risk to major ESG issues within its industry. It steers away from companies affiliated with tobacco or weapons.

SRI Frequently Asked Questions

What is the history of SRI?

The concept of SRI dates back to the 1700s when the Quakers refused to participate in the slave trade, which was the business of buying and selling humans. For quite some time, socially responsible investors simply avoided “sin industries” like tobacco and gambling. In the 1960s, however, this trend evolved and people began to make investment choices to benefit the greater good.

How does negative screening apply to SRI?

Negative screening is a technique that involves screening a company’s products and services as well as their practices to decide whether to invest in it. If you find out a company engages in drugs, for example, you may avoid it.

How will SRI affect my portfolio?

While SRI can make you feel good, there’s also increasing evidence that states it can actually help your portfolio. This is because companies with a strong ESG track record often perform well or even better than their peers. In fact, they are usually more resilient when the market is down.

Am I a good candidate for SRI?

If you like the idea of an investment strategy that aligns with your personal morals, values, and beliefs, SRI may make sense. It can help you meet your financial goals while you support causes that can change the world for the better.

What is the SRI Conference?

Sponsored by a division of Goldman Sachs, the SRI Conference is an annual event that has been around since 1990. It’s known as the “largest, longest-running, and preeminent ESG-focused conference” and strives to take steps towards a more environmentally sustainable and socially equitable economy.

About Author
Anna Baluch
Anna Baluch has been writing about personal finance for more than seven years. She has written extensively on personal and student loans, mortgages, debt relief, auto financing, budgeting, banking, and more. Anna was featured on the "Burn Your Mortgage" podcast in July 2019, where she discussed how she paid off her mortgage in just 16 months. Anna's work has appeared on well-known personal finance websites including LendingTree, Business Insider, Credit Karma, Experian, Freedom Debt Relief, Rocket Mortgage, Policygenius, U.S. News & World Report, American Express, and more.