Table of Contents
- What Is a Socially Responsible Investment (SRI)?
- Understanding Socially Responsible Investment (SRI)
- SRI Performance
- What’s the Difference Between ESG and Socially Responsible Investing?
- How to Become a Socially Responsible Investor
- Criticisms of SRI
- Be an Informed Investor, Stay True to Your Values, and Achieve Maximum ROI
In 1985, students at Columbia University were frustrated that their school had investments in companies operating in apartheid South Africa. So on April 4, they blockaded Columbia’s administrative building, protesting the university’s lack of socially responsible investing (SRI).
The three-week protest resulted in a meeting among the investment fund’s trustees. They decided to stop investing in companies with ties to apartheid South Africa. Because of the students’ efforts, the university redirected $625 billion to more socially responsible investments.
Thanks in part to the efforts of the Columbia students and others who avoided doing business with South Africa, apartheid ended in the early 1990s.
Socially responsible investors can drive social change and influence the world for good, while also producing long-term ROI. Keep reading to learn what being a socially conscious investor means.
- Socially responsible investing involves investing in companies committed to business practices that align with the investor’s values.
- SRI investors consider their values, including environmental sustainability, community development, fair labor practices, health, social justice, ethical corporate governance, and political views.
- A 2022 study found that SRI funds did not underperform conventional funds. Additionally, SRI funds have more diversified portfolios than conventional funds.
- While SRI and environmental, social, and governance (ESG) investing are related, SRI is a broader and more subjective investment strategy.
What Is a Socially Responsible Investment (SRI)?
Socially responsible investing (SRI) is an investment strategy that considers both financial return and social or environmental impact. It involves investing in companies committed to business practices that align with the investor’s values and avoiding those that participate in harmful practices.
Socially responsible investing aims to create positive change in the world through financial investments. SRI can encompass a wide range of issues, including environmental sustainability, labor practices, human rights, and community development.
Understanding Socially Responsible Investment (SRI)
Socially responsible investing began in the 1700s when Methodists in the U.S. discouraged any financial involvement with companies that participated in the slave trade, smuggling, or manufacturing liquor and tobacco products. Since then, the practice has become more popular and is often practiced by investors with various beliefs and values.
Because every investor has different values, the types of causes included in SRI can vary. Here are some of the most common issues socially conscious investors support:
An investor concerned about conserving natural resources, protecting animal and plant life, fighting climate change, or preventing pollution may choose to invest in companies working toward these causes. This could include investing in companies that produce or use clean energy or energy-efficient products. It could also include avoiding investments in companies that cause pollution or waste natural resources.
Socially responsible investors who prioritize community development often invest in companies that support small business development, encourage affordable housing, and revitalize neighborhoods.
Fair Labor Practices
A fair labor-focused SRI often includes investing in companies committed to paying workers a fair wage and avoiding companies that use child labor or unfair labor practices. It could also include avoiding companies that are discriminatory.
Many investors choose to avoid companies that produce unhealthy products, like tobacco, or that market highly processed foods to children. Other health-conscious investors invest their money in companies that work to increase access to healthcare or medical products.
Social justice-focused investors often care if the companies they invest in support gender and racial equality. These investors might put their money toward companies that donate to help fight prejudice and avoid companies that have not been supportive of minority individuals at their company.
Ethical Corporate Governance
Investors might consider the governance practices of the companies they’re invested in. Transparency and shareholder rights are often important to socially conscious investors.
Many investors want to know they’re invested in companies that share their political stances. In recent years, some companies have taken a stance on gun control, abortion, the Black Lives Matter movement, and the Israeli/Palestinian conflict. SRI investors might choose to only invest in companies that share their opinions on these issues and many others.
While some investors choose socially responsible investing solely because it aligns with their values, many people want to know they won’t have to sacrifice profitability while supporting the causes they care about.
Luckily, a 2021 study from Charles Schwab found that funds focused on sustainability had no increased risk and performed roughly average compared to a broad index. Similarly, a 2022 study found that SRI funds did not underperform conventional funds, and SRI funds have more diversified portfolios than conventional funds.
The research on SRI performance is far from complete. While recent research shows socially responsible funds do not hurt investor returns, some previous studies found otherwise. Additionally, it can be difficult to apply the results of an SRI performance study to your own investment practices because the values you prioritize in your investments may vary from the values used in the funds being studied.
What’s the Difference Between ESG and Socially Responsible Investing?
Many investors use the terms ESG and SRI interchangeably. However, although they are related, these are two distinct concepts. ESG, which stands for environmental, social, and governance, is typically an objective analysis that tracks specific data points related to environmental, social, and governance practices. There are a variety of organizations that aim to provide objective ESG scores, including the Dow Jones Sustainability Index, the FTSE4Good Index, Bloomberg ESG data, and the MSCI ESG indices.
On the other hand, SRI is a more subjective measure that relates to an investor’s personal values. If ESG metrics align with your values, you might choose to consider yourself a socially responsible investor. However, if your priorities lie elsewhere, ESG ratings might not be relevant to you.
An investor who follows a strict vegan lifestyle might want to invest in companies that follow vegan practices. However, veganism is not a metric tracked by ESG metrics, so this would be an example of SRI but not ESG investing.
How to Become a Socially Responsible Investor
1. Define Your Values
Before you start investing, it’s critical to understand which values are a priority to you. Some investors have many issues that are important to them, while others only focus on a few. Ask yourself what types of industries and companies you want to support and which you wish to avoid.
2. Choose Your Strategy
Becoming a socially responsible investor often involves these three actions:
- Divestment: If you’ve already built an investment portfolio, you’ll want to examine the stocks and funds within your portfolio to see if any are involved in industries or practices you believe are unethical. For example, an investor who wants to be more socially conscious might divest themselves from all investments in companies that use child labor.
- Positive Investing: If you have yet to build a portfolio or want to grow your portfolio, you can practice SRI through positive investing. This means investing in companies you believe do social good in the world. For example, if you support clean energy, you might invest in a solar power stock. If you want to support the fight against cancer or other diseases, you might invest in the stock of a medical research company.
- Negative Screening: This SRI strategy involves excluding certain types of securities or industries from your portfolio. For example, it’s common for SRI investments to screen out tobacco companies.
3. Decide How Much Help You Want
Once you’re ready to invest, you’ll need to decide whether you want help building your portfolio from a financial advisor or if you prefer a DIY strategy. A financial advisor can help you ensure your portfolio aligns with your values and help you maximize ROI. However, if you have a strong understanding of the investment world, you may be able to save on financial advisor fees by building a self-managed portfolio.
If you don’t feel comfortable investing on your own but want to avoid commission fees, a robo-advisor could meet your needs. The median fee for a traditional advisor is 1%, while robo-advisor fees are typically half of that.
Some low-cost brokerages with robo-investing and traditional financial advising options include:
Some brokerages and investment apps with self-managed portfolio options include:
4. Invest in Mutual Funds, ETFs, and Individual Stocks
If you’re working with a financial advisor, they’ll help you build a portfolio with the right balance of mutual funds, ETFs (exchange-traded funds), and individual stocks. Your advisor can also help you ensure the funds you choose align with your SRI goals.
However, if you’re self-managing your portfolio, you’ll need to pick your own funds and stocks. Many mutual funds and ETFs are specifically designed for ESG investing. If ESG is important to you as an SRI investor, it will be easy to pick a few funds that incorporate socially responsible companies and screen out unethical ones.
Here are a few environmental, social, and governance (ESG) funds to add to your portfolio. Remember, the best ones for you will depend on the values you’ve chosen to focus on in your investments:
- SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND): This fund practices positive screening for companies that have high ESG ratings.
- SPDR MSCI USA Climate Paris Aligned ETF (NZUS): This fund is for investors who want to focus their investments on companies committed to the Paris Climate agreement.
- Vanguard FTSE Social Index Fund (VFTAX): This fund excludes stocks related to adult entertainment, gambling, tobacco, alcohol, non-renewable energy, and weapons.
- 1919 Socially Responsive Balanced Fund (SSIAX): This fund considers fair and reasonable employment practices, contributions to the general well-being of the citizens in a company’s community, and respect for human rights.
If your SRI goals don’t align with any ESG funds, you’ll likely want to build a portfolio with a variety of individual stocks. Research publicly traded companies that align with your values to determine where your money should go.
Criticisms of SRI
While SRI has become a popular investment strategy, some investors are critical of the practice. Vanguard CEO Mortimer Buckley recently pushed back on sustainability initiatives in investing. In February 2023, he withdrew his firm from the Net Zero Asset Managers Initiative, an organization committed to investing only in companies that are compliant with the Paris Climate Agreement.
Buckley believes the financial world should allow investors to participate in ESG investing if they choose, but it should not be a requirement. After withdrawing from the agreement, Vanguard provides ESG funds as an option. However, it will also allow investors to invest in stocks that are not ESG compliant.
“We cannot state that [environmental, social and governance] investing is better performance-wise than broad index-based investing,” Buckley stated. “Our research indicates that ESG investing does not have any advantage over broad-based investing.”
Tesla CEO Elon Musk has been similarly critical of ESG. After Tesla was removed from the S&P 500 ESG index, Musk called ESG a scam. Tesla’s 2021 Impact Report stated, “Current ESG evaluation methodologies are fundamentally flawed. To achieve acutely-needed change, ESG needs to evolve to measure real-world impact . . . Current environmental, social and governance (ESG) reporting does not measure the scope of positive impact on the world. Instead, it focuses on measuring the dollar value of risk/return.”
Be an Informed Investor, Stay True to Your Values, and Achieve Maximum ROI
Individuals who earn the highest returns are often the most well-informed investors. They follow the advice of top investment experts, read the best investing books, and follow the performance of the markets.
Getting involved in investing with an SRI focus requires even greater attention to detail. Instead of simply following the financial returns of your favorite companies, you should also track their ESG ratings and business practices that relate to your values.
Here are a few podcasts to help you become the most informed SRI investor you can be:
To learn more about investing and personal finance, check out these articles:
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- Columbia University students win divestment from apartheid South Africa, United States, 1985 | Global Nonviolent Action Database. (2023). Retrieved 30 March 2023, from https://nvdatabase.swarthmore.edu/content/columbia-university-students-win-divestment-apartheid-south-africa-united-states-1985
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- Impact Report 2021. (2023). Retrieved 30 March 2023, from https://www.tesla.com/ns_videos/2021-tesla-impact-report.pdf