The last few years have been ones of stress and uncertainty - but it’s also been a time that’s brought to light issues of social justice, climate change and social responsibility. Here, we look into how more and more investors are opting to align their portfolio with their greater social beliefs and ideals.
Socially responsible investing (SRI), is an investment that is considered socially responsible due to the business company conduct code. Socially responsible investments can be made into individual companies with good social value, or through a socially conscious mutual fund or exchange-traded fund (ETF). And it's not going away anytime soon. In fact, between 2016 and 2018 alone, assets being placed in socially responsible investments rose 38 percent. Of the $46.6 trillion of assets under management, one in four dollars was in SRI assets.
Becoming a socially responsible investor isn't difficult — and can be even more lucrative than traditional investing. Here's a look at SRI and what you should know.
Examples of Socially Responsible Investing
The abbreviation “SRI” has also come to stand for sustainable, responsible and impact investing. Some SRI practices use a framework of environmental, social and governance factors to guide their investing.
There are two inherent goals of socially responsible investing: social impact and financial gain. The two do not necessarily have to go hand in hand. When an investment is risking gambling itself as being socially responsible, it doesn't mean that it will provide investors with a good return. An investor must still assess the financial outlook of the investment while trying to gauge its social value.
One example of socially responsible investing is community investing. Community investing goes directly toward organizations that have a track record of social responsibility through helping the community, as well as being unable to garner funds from banks and financial institutions.
The funds allow these organizations to provide services to their communities, such as affordable housing and loans. The end goal is to improve the quality of the community by reducing its dependency on government assistance such as welfare, which in turn has a positive impact on the community's economy.
Understanding Socially Responsible Investing
Investors interested in SRI don’t select investments by the typical performance metrics or expenses, they make investments on whether a company’s revenue sources and business practices align with their values. Everyone has different values, how investors define SRI will vary from person to person. There's no one size fits all in this scenario.
If you’re passionate about the environment, your portfolio will likely have investments in green energy sources such as wind and solar companies. If you care about supporting women, people of color and other marginalized groups, you may have some mutual funds that invest in women-run companies or hold stock in Black-owned businesses. Socially responsible investing is as much about the investments you don’t choose as the ones you do.
SRI vs ESG vs Impact Investments
In the realm of SRI, you’ve likely heard other terms like ESG and impact investments. So, what's the difference? Here's a quick breakdown:
- Socially responsible investing (SRI) entails screening investments to exclude businesses that conflict with the investor's values. SRI excludes companies from an investment that are involved in certain businesses, e.g. gambling, alcohol, or fossil fuel. It’s useful for single-issue investors.
- Environmental, social and corporate governance (ESG) investing focuses on companies making an active effort to either limit their negative societal impact or deliver benefits to society (or both). ESG rates companies on environmental, social and governance criteria to find the “good” ones. There are, however, no standardized criteria, so it depends a lot on who’s deciding what counts as “good”.
- Impact investing is characterized by a direct connection between values-based priorities and the use of investors' capital. Impact investing looks at the specific measurable impact of a company on a particular issue, e.g. climate change, gender lens investing, etc. Investors can see the measurable impact of their money alongside the financial returns.
How to Build a Socially Responsible Investment Portfolio
Creating an ethical portfolio doesn’t have to be difficult or intimidating. As long as you know the values that are important to you, you can start using your investment dollars for good. Here’s a couple tips on how to build an SRI portfolio:
Outline What’s Important to You
It may be helpful to specifically write down what you’re looking for in an SRI or ESG investment. Would you be comfortable owning stock in a company that scores lower in the environmental category if it had a majority-female board of directors? Knowing what industries you are and aren’t OK with supporting will make it easier to include or exclude certain investments.
How Much Help Do You Want?
There are a couple of avenues you can choose when it comes to creating an ethical portfolio. You can build it yourself, picking and choosing specific investments and monitoring them over time, or you can get some help. If you want maximum assurance that the companies you’re investing in support your personal definition of SRI, you may want to create your own SRI portfolio.
A majority of people prefer to make socially responsible investments when possible — but it takes some work to figure out how committed a company really is to ethical practices. This is where robo-advisors come in. Robo-advisors use algorithms to build and maintain an investment portfolio based on your risk tolerance and goals.
The upside of robo-advisors is they’re inexpensive, and several offer SRI portfolios that will do all the work of finding ethical investments for you. The downside is that they don’t let you add in specific investments you’re interested in.
Research with Care
An easy way to judge how socially responsible a company is is to review ratings from independent research firms. Two types of investments you may consider for a sustainable portfolio are stocks and funds.
- Individual stocks generally shouldn’t encompass more than 5% to 10% of your portfolio, but if there is a company you expect will show strong growth, you may want to include it.
- Mutual funds are an easy way to instantly diversify your portfolio, and there are more sustainable funds to choose from than ever before. Mutual funds include selected assets that adhere to criteria laid out by the fund manager. If your broker has a screening tool, it can likely help you sift through different fund options to find the right ones for you.
For many investors, socially responsible investing is a powerful way to align their investment portfolios with their personal philosophies.
When you’re getting started with investing, it’s important to research the options available to you. Now you know that Socially Responsible Investing (SRI) involves investing in companies that promote ethical and socially conscious themes including environmental sustainability, social justice, and corporate ethics, and fight against gender and sexual discrimination - how will you use this information?
If you're interested in getting involved with SRI and looking to add it to your portfolio, Agemy Financial Strategies can be of assistance to you.
Our team of Fiduciary financial advisors only have your best interests at heart and are here to help you understand the ins and outs of investing for retirement income.