There are plenty of ways to show support for causes that are near and dear to us, but making a financial investment isn’t typically the first thing we think of when seeking a way to give back. It’s time to take a second look, though, because investing doesn’t have to be just about financial gains.
Socially responsible investing (SRI) allows investors to put their money in companies that have a positive impact in their community, their country, or around the world. Often referred to as “sustainable” or simply “responsible” investing, the actual investment process for SRI funds isn’t any different than non-SRI funds — but it does result in bigger returns in the “personal values” department. You can shop for SRI options in the same places and pick them up at the same brokerage firms, so you won’t be starting from square one if you already know how to invest.
When I talk to investors, I often hear, “Does socially responsible investing mean sacrificing returns to invest in my values?” While there was once some truth to this, it doesn’t hold nearly as much weight today, as SRI-specific screening processes have become more sophisticated. Today, socially responsible mutual funds are often competitive with traditional ones. In some cases, they can even have less risk associated because the companies included in the funds tend to have more sustainable business practices. They also undergo the same type of research and vetting by fund managers that every mutual fund is put through before being assessed for commitment to social responsibility.
A quick note before diving in: Since we’re talking SRI basics, I’m going to focus on investing in mutual funds. While experienced SRI investors may choose to individually select their stocks and bonds, mutual funds are often a great way to get your feet wet with SRI. Taking this approach means you’ll have professional guidance as you filter companies that are closely aligned to your values, and you’ll be able to seek investment advice from your financial planner along the way.
What’s Socially Responsible?
When a mutual fund chooses socially responsible companies for its investors, it looks at three categories:
- Environmental: Does the company have a specific policy about environmental impact? What sustainability practices does it have in place?
- Social: What is the company’s approach to health and safety, diversity, and human rights? Does it give back to its community?
- Governance: What level of transparency does the company provide when it comes to things like executive compensation or political contributions? Is the company known for taking accountability for its business decisions?
As of 2014, more than 900 investment funds met the environmental, social, and governance (ESG) criteria outlined above.
Beyond this criteria, you’ll also want to consider your personal values when choosing where to invest. The Forum for Sustainable and Responsible Investments is a great place to start your research. Its Mutual Fund Performance Chart provides a rating for each fund in the Environmental, Social, and Government categories. You’ll also find each company’s stance on investments in areas that may raise a red flag, including tobacco, alcohol, gambling, and weapons. It’s up to you to decide if such categories are or are not a deterrent to investing in a company. If you don’t think a company is socially responsible based on your own definition, you don’t need to put your money there.
Defining Your Portfolio
Once you’ve done your research and you’re ready to make some moves, the next step is to sit down with a financial planner and let them know that you want to invest in socially responsible companies. Make sure you share your personal qualifications for what should qualify as “socially responsible.” Your financial planner will be able to help you choose the appropriate funds and answer any questions.
You’ll also want to discuss the portion of your portfolio that will be dedicated to SRI. This decision is a highly personal one, and your financial advisor can help bring some clarity to the right approach. Keep in mind that there are no “shoulds” or “musts” when it comes to dedicating a portion of your profile to SRI — it all comes down to what makes sense for you and your financial goals.
Shareholder Advocacy and Impact Investing
There are two other aspects of socially responsible investing that are worth mentioning. The first is shareholder advocacy. Put simply, let’s say a company meets 90 percent of the SRI criteria. Pressure from shareholders could push that company’s executives to shift their approach and become accountable for that remaining 10 percent. In these cases, a mutual fund manager can represent the collective interests of individual shareholders, and (hopefully) ultimately enact change. This can be done through dialogue, shareholder resolutions, public education, and in some cases attracting media attention. Shareholder advocacy is a great way to encourage company best practices in a variety of areas, such as reducing carbon footprints and increasing gender diversity on boards or corporate transparency.
The second aspect is community investing or impact investing, a fast-growing segment within SRI that can most easily be achieved at the mutual fund level. In this case, investor capital is directed into areas that are underserved by traditional financial institutions, like community health care, housing, job training, low-interest loans for small businesses, or child care centers.
Once you’ve made your investments, you’ll want to keep an eye on how those funds are performing in the market. The great thing about doing socially responsible investing on the mutual fund level is that the portfolio manager does much of the monitoring. In the case of actively managed funds, SRI companies are periodically researched to ensure they maintain the necessary criteria, and funds add or remove companies based on their changing business approaches. It’s also a smart idea for all investors to periodically revisit their investment goals and strategies to ensure both are always a personal fit. Overall, you can focus your energy on the fact that your investments are in line with your values and in support of social good.
Before joining the Society of Grownups, Rachel Rabinovich was a financial advisor with Ameriprise Financial, where she helped clients manage their investments with an emphasis on sustainable and responsible investing.
The information in these materials is only intended to provide general education. It's not legal, tax, or investment advice, and may not apply or be useful to your specific financial situation. If you need recommendations geared to your personal financial situation, schedule time with a financial planner. Any third party resources or websites referenced above are not under Society of Grownups’ control. We cannot guarantee and are not responsible for the accuracy of the resources, websites, or any products or services available through such resources or websites.