Ask An Advisor: Am I Invested in Ethical Companies?

  • By Jocelyn Black Hodes, DailyWorth's Resident Financial Advisor
  • June 03, 2013

The most common way to invest in a value-conscious way is to buy SRI mutual funds. There are several SRI-dedicated companies, such as Calvert, Domini, Parnassus, Pax, and GuideStone, and more and more traditional mutual fund companies are including SRI funds in their menu of choices. Lower-cost SRI exchange-traded funds or ETF’s are starting to emerge with current offerings from ESGShares, Powershares and iShares. You can also try buying individual stocks and bonds from certain companies and/or governments using the SRI screening methods described below, and if you happen to have a lot of money to invest, you could consider paying extra for professional management of a SRI portfolio of different kinds of investments.

There are generally three methods of screening an individual company for inclusion or exclusion into an SRI fund; the Negative Screen, the Positive Screen and the Restricted Screen. A Negative Screen, for example, could be a fund manager’s conscious decision not to invest in a company that has any participation in a particular sector, such as tobacco. A Positive Screen is when a manager seeks out and invests only in companies that are involved in a particular sector, like renewable energy. With a Restricted Screen, a manager might still allow a company with questionable activity into the fund if the negative effect is deemed to be minimal enough relative to the other activities of the company.

As with any type of investing, there are tradeoffs with SRI. Practicing SRI can make you feel good that your investment choices reflect your values. However, you should weigh this benefit with the potential drawbacks, including limited diversification (which could translate to higher risk), weaker performance (SRI funds have tended to lag their respective benchmarks and non-SRI peers), higher costs (potentially due to the extensive research required) and shorter history (which could make it harder to gauge future potential).

So, if you are committed to SRI, you should do thorough research to make sure that you ultimately create a portfolio that has the diversification and level of risk that you are comfortable with and the cost-adjusted performance potential you need. Depending on your level of commitment, it may be worth the added cost of paying a financial professional to do the research for you and create an SRI investment plan that is suitable for you.

For more information and SRI resources, including a directory of SRI advisors, mutual funds and separately managed accounts, check out the Forum for Sustainable and Responsible Investing.

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