Your Guide to Socially Responsible Investing

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When you think of being socially responsible, daily lifestyle habits like recycling or volunteering may be among the first things that come to mind. In fact, investing may be at the very bottom of your socially responsible to-do list — if it even occurs to you at all.

But these days, Socially Responsible Investing (SRI) is generating a great deal of interest from investors. The idea? You don’t have to choose between growing your money and standing by your values. So, is it possible to align these things? We’re taking a look at what SRI entails and how to get started if it sounds like an investing strategy you’d be interested in pursuing.

What Is Socially Responsible Investing?

Socially responsible investing, or SRI, is pretty much exactly what it sounds like. The main premise is that by investing in companies who share your social values, you can make a social impact and profit at the same time. One popular form of investing that falls under the SRI umbrella is ESG, which stands for Environmental, Social, and Governance investing. While SRI was once considered a somewhat radical investing strategy, it’s an idea that’s only grown in popularity over the past decade. 

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So, what kind of companies fit into SRI? Often, companies might engage in one or more of the following practices or exhibit some of the following values: 

  • Dedicated to recycling or effectively replenishing natural resources
  • Produce or utilize clean/sustainable energy  
  • Known for embracing and celebrating diversity in the workplace
  • Use fair trade products or otherwise promote human rights
  • Promote fair lending habits or offer affordable housing
  • Retain CEOs who champion fair pay, worker’s rights, or other socially responsible values

As you can see, there are a wide variety of options when it comes to defining what SRI means for you as an individual. The idea is to seek out companies that promote the same values you’d like to see grow in the world, thus allowing you to align your money and your values. 

Where Morals Meet Monetary Gain

The idea of investing in companies whose visions align with your own is great on paper, but is it a profitable strategy? According to studies, there’s no need to choose between ethics and profits. A 2021 study by the Morgan Stanley Institute for Sustainable Investing revealed that sustainable funds and ESG investments outperformed their peers during the COVID-19-fueled volatility of 2020. In particular, the study noted that funds that focused “on environmental, social and governance (ESG) factors, across both stocks and bonds, weathered the year better than non-ESG portfolios.”

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On one level, the continued growth of socially responsible companies makes sense simply because investors want to see companies with strong ethical values succeed. But it also makes sense that corporations that adopt such values will ultimately enjoy more success for more subtle reasons. That is, by embracing and living out certain values, these corporations are the ones that are going to produce a happier workforce, enjoy a better relationship with the communities where they operate, and pioneer the kinds of social changes that many people are already hoping to see.

What Could SRI Investing Look Like for You?

One of the perks of SRI investing is that there’s a great deal of room for interpretation when deciding what it means to you as an individual investor. For some people, it may equate to investing in companies that promote gender or racial inclusivity in the workplace, while for others it may mean investing in industries that are developing cleaner forms of energy. For other investors, it may be more a matter of what not to invest in, such as tobacco companies, gun makers, or companies that are known for leaving behind a large environmental footprint.  

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As mentioned above, the definition of social responsibility can vary from person to person. The trick is to sit down and figure out what causes mean the most to you. Some questions you might ask yourself include:

  • What are the top one to three social changes I’d love to see happen within the next decade? Or within the next 25 years?
  • If I had the power to change one of the following issues, which would I choose? (i.e. climate change, social justice, health, promoting fair trade/worker’s rights, etc.)
  • Am I looking for a shorter- or longer-term investment?
  • Do I want to invest in individual companies, exchange traded funds (ETFs), or mutual funds?

As you can see, there are no right or wrong answers. After narrowing down your focus, be sure to do your due diligence to research which companies or funds seem to be the best investments based on their fundamentals and/or performance.

Where to Start Looking For SRI Opportunities

Investing in individual companies is a great strategy for those willing to do the research. A great place to start when looking for ESG companies is with the Morgan Stanley Capital International (MSCI) ESG Ratings Corporate Search Tool. Simply type in the company you’re looking into and you’ll be able to see their grade based on a number of social responsibility-based criteria.

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If you’d like to take a broader approach, investing in ESG funds or exchange traded funds (ETFs) is a solid approach as well. These options allow you to invest in a variety of pre-screened companies that are all focused on the same goals. 

Some popular examples include:

Vanguard FTSE Social Index Fund Admiral (VFTAX): While VFTAX doesn’t specifically screen for things like corporate quality or environmental impact (beyond fossil fuel use), it does make a point of excluding companies with ties to certain industries, including alcohol, tobacco, adult entertainment, gambling, nuclear power, and/or fossil fuels. Companies that have been involved in controversies linked to corruption, environmental issues, or human rights violations are also cut from the list.

iShares: iShares offers a number of ETF options that you can explore using your own unique set of filters. Whether you’re looking for a fund that supports certain sectors or simply one that screens out companies involved in unsavory controversies, iShares makes finding the right investment easy.

1919 Socially Responsible Balanced Fund (SSIAX): SSIAX is a fund that focuses on undervalued securities with long-term potential, all of which meet the standards of SRI investments. The fund actively excludes companies significantly linked to fossil fuels and focuses on including those with fair employment practices and a track record for respecting and championing human rights.

Obviously, the funds you’ll find above are far from a complete list, so make sure you do your research to find the investment that’s best for you.