Green living, conscious consumerism, and sustainable practices have taken root in both homes and businesses. In addition to recycling, using eco-friendly products, and sourcing ethically, consumers are now interested in sustainable investing. Also known as socially responsible investing, sustainable investing is surging in the U.S., accounting for 33% of total managed assets.
What Is Socially Responsible Investing?
Socially Responsible Investing (SRI) is the act of investing in companies that share your social values–earning a profit but ensuring that you have minimal negative impacts on social well-being and the environment. This is in line with the Triple Bottom Line (TBL) of sustainability: People, Planet, Profit.
So, what does the practice mean exactly?
Understanding Socially Responsible Investing
Socially responsible investing generally involves investing in assets managed with environmental, social, and governance (ESG) considerations. Ethical investors use these factors to evaluate individual stocks, though they may also consider other factors.
The environmental aspect of ESG includes factors like clean and renewable technology, carbon emissions, water conservation, and food security. The social element looks at anti-bias issues, community development, labor practices, working conditions, and workplace benefits. The governance area includes board or top-level management diversity, political affiliations, anti-corruption, and nepotism issues.
Understanding values-based investing isn’t always straightforward because many Exchange Traded Funds (EFTs) and mutual funds exclusively focus on high-scoring companies. This means that an investor might find a high-scoring tech company with excellent ESG practices, but the company still may not be ideal for the investor if they are keen on excluding specific sectors, like tech, from their investments.
Additionally, some funds focus on specific social and environmental goals but don’t necessarily have very high ESG scores. Investors might need to decide whether investing is ethical based on what they value most. For example, the Fidelity Focus Sustainability Fund focuses on clean water. Other issues, such as carbon emissions and gender equality, might not necessarily be an investor’s primary concern if they want to support clean water access. Thankfully, the market is expanding, and investors will have better and more options in the future.
How to Build a Socially Responsible Investment Portfolio
Building a socially responsible investment portfolio is getting easier due to an increase in the popularity of SRI. A 2019 Morgan Stanley Survey showed an increase in sustainable investing, from 75% in 2017 to 85% in 2019.
The Morgan Stanley report further showed that millennials are the most interested group: 95% want a socially responsible investment portfolio. These numbers are expected to increase, especially after the United Nations Climate Change Conference (COP26) in November of 2021.
Investors are also seeing an increase in available options. According to Morning Star, an investment research company, sustainable open-ended mutual funds and exchange-traded funds (EFTs) increased from 111 in 2014 to 303 in 2019.
Now, how do you build a socially responsible investment portfolio with all these options in mind?
Understand What Values are Important to You
Write down the values that you find most important, and look for companies that share these same values.
For example, a company that lowers emissions and embraces green practices might be important to you. But say you value accountability more, so an annual sustainability report is vital. This means that you would only invest in companies with a green agenda that share periodical sustainability reports backing their claims.
Decide if You’re Doing it Alone or Will Seek Help
Some investors choose to do everything themselves. Should you choose this option, take time to fully understand and authenticate a company’s values and their commitment to them. You’ll also need to open a brokerage account. Remember that some brokerages have more robust sustainable investment offerings than others.
Alternatively, you can seek help from advisors to understand how committed a company is to its values. Consider getting a robo-advisor, which will use algorithms to build and maintain your sustainable investment portfolio based on your values and risk appetite, with little to no human intervention.
Know Your Deal Breakers
Despite sharing your values and goals, a company might fail to be a perfect fit if they do certain things. You should, therefore, know and identify your deal breakers.
For example, a company keen on green energy and ethical practices might be a great fit, but only one gender is in top management. This might be a deal-breaker for someone who values gender inclusiveness and equality.
Conduct Personal Research
Personal, independent research is essential, whether you’re investing alone or with help. Individual research helps you understand your socially responsible investment portfolio better, ask clearer questions, and make informed decisions. Independent research can also help you identify brokerages that aren’t aligned with your investment goals.
Now, after taking these steps, where do you invest? Let’s dive into some examples of what socially responsible investment looks like.
Socially Responsible Investment Examples
Although socially responsible investment should earn you a profit and have a positive environmental and social impact, these two elements sometimes don’t go hand-in-hand. For instance, you might make a positive impact but little to no financial gain.
So, what are some examples of sustainable investments?
- Directly investing in organizations that help that support community but haven’t gained money from financial institutions.
- Investing in mutual funds that focus on companies with good environmental and labor practices.
- Investing in projects that advance civil rights, for example, by eliminating discrimination at work.
Why Participate in Socially Responsible Investing?
Making money doesn’t mean that you disregard your moral standards. For example, if your religion or upbringing frowns on alcohol consumption, you’re not likely to invest in a bar. Similarly, being true to your moral compass is one of the benefits of socially responsible investing.
Ethical investing also enhances peace of mind. With the current climate crisis, for example, eco-conscious people are struggling with eco-anxiety. As Reference notes, 70% of people in the U.S are worried about climate change, and over 50% feel helpless. Investing in companies that seek to reduce the impact of climate change can help alleviate the issue.
Socially responsible investing improves risk management. Some problems, though not visible on financial statements, can cripple a company. For example, a high-performing company could lose value overnight if a case of rampant gender discrimination or sexual harassment came to light. This risk is averted if you invest in a business dedicated to healthy and safe workplaces.
Lastly, socially responsible investing simply provides a sense of well-doing. Many people sleep better knowing that their investment helped prevent starvation in a local community or helped provide clean and safe water. Wouldn’t you?