We all like to think of ourselves as good people, right? Or at least, we try to be. But this looks different for everybody. Some protest and march, some volunteer, some change their shopping habits, and some spread the word. Others take a little more time to choose where their investment dollars go.
If doing your part to make the world a better place might look like investing in companies making a positive impact, here’s what you should know about socially responsible investing.
Socially responsible investing or SRI is an investment strategy that involves choosing investments according to your personal beliefs and values as well as financial factors.
This strategy is also called ethical investing, sustainable investing, or values-based investing.
Socially responsible investing is about putting your personal values before or alongside financial gain. You’re thinking about causes you care about and your goal is to drive positive change by supporting the “good” companies and not supporting the “bad” ones. Yes, you want to make money. But you also want to make a difference.
The term “socially responsible investing” is commonly used as an umbrella term for many different strategies. You might see ESG investing — or environmental, social, and governance investing — and impact investing simply called socially responsible investing. All of these refer to the practice of investing with your beliefs.
There are so many different types of ethical investments. And since it’s personal, there are really no “wrong answers.”
Here are just a few examples of causes and issues you can support with socially responsible investments.
- Environmental sustainability
- Human rights
- Community growth
- Animal welfare
- Fair wages and workplace equality
- Gender empowerment
- Affordable housing
- Healthcare access
- International aid
Socially responsible investments can be almost anything. If there’s a social issue you care about, chances are you can find companies to invest in that also care about that issue and others.
Types of socially responsible investments
Socially responsible assets come in many different shapes and sizes. But here are two main types:
- Individual investments: Stocks or even fractional shares of socially responsible companies.
- SRI funds: Socially responsible mutual funds and exchange-traded funds (or ETFs) made up of companies from a variety of different industries.
Choose individual investments if you want to handpick your assets and research each company. This option is better for investors who want to actively trade and maximize their profits by looking for growth opportunities.
Choose a fund if you want to invest in many different companies at once. This is an ideal option for investors with less capital and a good long-term strategy overall. But while SRI funds can be easier for diversifying and much more passive, you’re not in control. It’s up to fund managers to decide what socially responsible means, and you might not always agree with their picks.
Socially responsible investing (SRI) and ESG investing are two different strategies. But they’re often confused, so we’ll set the record straight.
While ESG uses scores and metrics to grade investments objectively, SRI is personal and ethically driven. It requires investors to consider their values when choosing investments, which is possible with ESG investing but not necessarily the point.
ESG is a system for measuring a company’s sustainability and impact using environmental, social, and corporate governance factors. ESG investing considers how these factors affect a company’s performance and overall responsibility. It uses both financial and non-financial considerations to choose investments with the goal of reducing risk and increasing returns.
Socially responsible investing is about values. You choose investments that align with causes you support and you specifically don’t invest in ones that have a negative impact.
Read more: ESG vs. sin stock investing: Which option will give you the best returns?
How they’re used together
As you might imagine, there is often an overlap between ESG investing and SRI. For example, many SRI investors take ESG factors into account when comparing investments. Here’s how it works.
With ESG investing, all investments are scored and the highest scores are considered to be the best opportunities. With SRI, investments are weighed against criteria and may be disqualified if they conflict with values. Even investments that could be profitable might not be included as an option if they aren’t seen as socially responsible.
It is very common for investors to use SRI strategies to narrow down their options and then ESG metrics to choose the most promising investments. And it works the other way too.
How SRI screening works
A lot of us don’t realize that the companies we support and invest in are not only not acting in socially responsible ways, but sometimes having a significant negative impact on society.
This is what SRI screening aims to address. It’s about boosting the companies doing the right things and not letting companies doing the wrong things get away with it.
SRI usually uses a combination of negative screening and positive screening to narrow down investment opportunities. With negative screening, you weed out companies with business practices that are actively harmful. Then, with positive screening, you put a spotlight on companies doing good. From there, you have a pool of SRI investments to select from.
This isn’t the only way to do it, but it is one of the most common. You can also use a positive investing strategy to skip right to the companies with a positive impact, but this can take longer.
How to build an SRI portfolio
The process of finding responsible investments varies from investor to investor since it’s all about personal values.
For example, one investor might automatically rule out any companies known to take part in animal testing while another might rule out companies with massive carbon footprints. This would probably leave them with some of the same choices and at least a handful of different ones (since a company can do some things “right” and other things “wrong”).
Most investors start by excluding investments because this makes the process of identifying opportunities less overwhelming. But this can still be time-consuming as it requires a lot of research into a business’s practices, policies, ethics, and more.
Here are some options for building an SRI investment portfolio more easily:
These options can at least give you a good place to start. Then, you can select for the investments you want after doing your own research to determine which ones best align with your values.
Read more: An easier way to get into socially responsible investing
There isn’t just one way to get started with SRI. There are many ways to incorporate this investment strategy into your life and an infinite number of causes to invest in.
Here are some steps you would take to get going with socially responsible investing.
Choose your causes
The first step is to decide what you care about. Not all socially responsible investors invest in the same causes, and thinking about this ahead of time can help make every other decision easier.
Remember, a socially responsible investment is anything you want it to be. You just invest in what you’re passionate about. If that’s gender equality, focus on companies without gender pay gaps. If it’s being green, invest in carbon-neutral or carbon-negative companies. Etc., etc., etc.
You’re trying to make a positive social impact by supporting the right companies and not supporting the wrong ones. So you should also think about the things you stand against.
You can choose as many causes to invest in as you like and change your mind about your priorities as you go. Thinking about what you stand for before sitting down to choose your investments can also remind you why you’re doing this.
Plan your portfolio
Consider how socially responsible investments will fit into your portfolio and routine.
There is no golden percentage or perfect rule for everyone. It all depends on your risk tolerance and other strategies. You could replace a stock or two with sustainable alternatives or create a completely separate SRI portfolio, but refrain from changing your entire investment portfolio at once.
If you have questions about your asset allocation, talk to a financial advisor.
Decide how involved you want to be
Will you choose every investment yourself, or would you rather invest in a fund or with a robo-advisor? Both of these options are perfectly fine, but one is a lot simpler for you.
Only create an SRI portfolio yourself if you have some experience with investing and you’re confident in your ability to compare assets. There are unique risks with SRI, and your investment decisions will take time.
If you’re newer to investing or you want a more hands-off approach to SRI, consider a robo-advisor. These screen for you and help you find the right assets and allocation.
There are advantages and disadvantages to each of these options. Choosing individual investments lets you build your perfect SRI portfolio but requires more effort. Going instead with a robo-advisor offers the advantage of convenience and easy diversification but might mean you get an asset or two you’re not jazzed about. Consider these trade-offs.
Choose a platform
After you decide how involved you want to be, you can choose a platform. A stock brokerage or trading platform is best for those who want to handpick their investments. For something more passive, a robo-advisor is a good choice.
Best robo-advisors for SRI
Wealthfront and M1 are two great platforms that simplify SRI. Wealthfront is a robo-advisor offering pre-built SRI portfolios you can tweak and customize, and M1 is a hybrid robo-advisor and brokerage with SRI “pies” created by the platform and even pies shared by the community.
Read more: M1 vs. Wealthfront: Which robo-advisor is right for your investing style?
Best stock brokerages for SRI
Public is one of our top recommendations for SRI-friendly platforms. This social investing app makes it easier than most to research company profiles, and the social aspect also lets you see what other investors are saying about any given investment. And because it allows fractional investing, it’s good for diversifying with less money.
Another great option is TD Ameritrade. This brokerage has long been one of the best for affordable trading, with no fees for stock and ETF trades and no minimum investment requirement. It offers a wide selection of funds including many no-transaction-fee mutual funds, making it a solid choice for active investors who need options.
Do your research
This is less of a one-and-done step and more of an ongoing task. A socially responsible investing strategy requires a little more due diligence than a traditional strategy that’s all about numbers and performance. You have to know what a company is actually up to.
Sometimes socially responsible companies are easy to spot and other times not so much. You’ll need to find out more about business practices by digging into reports, mission statements, news articles, forums, and more.
Many investing platforms offer free resources, including market research and company profiles, so you can do all your digging in one place. Always take advantage of these.
SRI comes with many potential benefits, but it also comes with risks. Here are some of the possible advantages and disadvantages of choosing this particular strategy.
With socially responsible investing, you get to feel good about where your money is going and invest in the futures of companies and brands worth supporting. You can claim a small role in any progress that happens as a result of these businesses prospering and fulfill some of your sense of social responsibility.
If more people were to financially support businesses working to make the world a better place, these businesses would grow in prominence and likely have a ripple effect on the market as a whole.
SRI can also offer financial benefits. There is evidence to suggest that SRI is a safer alternative to traditional investing because socially responsible companies are more competitive since they’re open about their practices and responsible. Usually, consumers recognize when businesses care about more than just profits and choose these over others.
With SRI, you have to be comfortable with a certain level of risk and involvement.
Although SRI is personal, performance depends on other people too. If you invest in a cause not a lot of investors care about, support a business that some find controversial, or your chosen niches ebb and flow in popularity, your portfolio could be negatively impacted.
Financial returns also vary considerably based on which causes you support. For example, if you invest in eco-friendly companies, you might earn a profit fairly quickly as sustainability is becoming more important to consumers as a whole. But if you invest in a company doing something more outside the box, the public could take a while to catch up.
Another potential disadvantage of SRI is effort. If you choose investments for yourself, you’ll be spending a lot of time researching. And even if you pick mutual funds and robo-advisors to save time, it can still be pretty hands-on.
You might be a good candidate for socially responsible investing if you like the idea of investing in positive change. This strategy offers a lot of benefits and may even give you better financial returns than what you’re doing now if you’re smart and you take your time. It can also make you feel like you’re making a difference.
But going against the flow can also be bad news. It can mean that your portfolio takes a hit if people disagree with you, that growth is slow or nonexistent, or that companies that are making a positive impact but not much profit don’t succeed (and that the “bad ones” win). SRI can also be more work for you as an investor.
If you do decide that SRI is right for you, it’s important to find the right asset allocation and the right approach. Consult a professional such as a financial advisor to talk through this if you want help.
Alternatives to SRI
If you’re on the fence about sustainable investing but you still want to do good with your dollars, there are many alternatives to SRI that accomplish the same end goal in different ways.
Investing by purchasing shares and stock isn’t the only way to financially support businesses you believe in and support causes you care about. You can also:
- Shop intentionally: Conscious consumerism is the practice of being mindful of the impact your spending has and buying from companies that are making a positive difference. Being loyal to brands doing good things can help them thrive, and even just one passionate consumer can go a long way in promoting these businesses.
- Pick ethical banks: Choose ethical banks for your money and other financial needs. Financial institutions have a huge impact on the market and economy, influencing policy and change. Where you bank matters.
- Make community investments: Community investing, also called impact investing, involves supporting groups directly helping people. For example, investing in a bank providing lending to borrowers who couldn’t get it otherwise or a loan fund for affordable housing. This is like charitable donating but can lead to profit.
Read more: 12 easy ways to make your money green and protect our planet
Socially responsible investing (SRI) is an increasingly popular strategy with investors who want their investment dollars to have a positive societal impact. If that sounds like something you could be into, consider adding socially responsible investments to your portfolio. SRI is more accessible than ever, with a variety of platforms creating resources and options for passionate investors to try it out.
Just make sure you understand the inherent risks of SRI, the best ways to choose investments, and how to tell if a company or fund is really socially responsible or not.
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