See the results of our 2022 Personal Finance Study!
Socially Responsible Investing Exists — Here’s How to Start
Are you ready to start investing? That’s great news! But maybe you’re wary of investing in causes that are doing more harm than good?
That’s where socially responsible investing (SRI) comes in.
The focus of SRI is investing in an ethical, conscientious way. Investors put their money toward social causes — like investing in environmental companies — and divest from companies that conflict with their beliefs.
Interested? Here’s what SRI is all about — and how to get started.
What is socially responsible investing?
Socially responsible investing (SRI) is an investment strategy that focuses on how a company conducts business. Typically an investment is considered socially responsible when it uses an environmental, societal, and governance (ESG) framework.
Why does socially responsible investing exist?
The sad truth is that many investors are inadvertently supporting and investing in companies that engage in practices that may not align with their values.
The solution? Socially responsible investing.
The mission of SRI is to balance ethical change with potential financial returns. Companies that are socially responsible strive to make a positive societal impact, such as a sustainable energy company. Choosing SRI- or ESG-compliant funds can be a smart option to help diversify your portfolio.
What are other types of socially responsible investing?
An investor who selects investments based on ethical or moral principles is engaging in ethical investing. Ethical investors seek to avoid companies that are involved in stigmatized business practices, which are considered unethical, immoral, or unsavory.
SRI is often referred to as ‘sustainable investing’ and/or ‘impact investing.’ Sustainable investing allocates investment capital to companies that are dedicated to furthering societal change while promoting corporate responsibility.
Faith-based investing allocates funds in accordance with beliefs informed by religious teachings. It is based on the idea that how a business makes money is just as important as the amount of money it makes. Many faith-based investors avoid “sin stocks,” which refer to stocks in companies involved with the gambling, firearms, pharmaceutical, alcohol, and tobacco sectors.
Halal investing, for example, is a faith-based approach that aligns with Islamic beliefs.
How can you build a socially responsible investment portfolio?
Investors interested in socially responsible investing consider more than the typical metrics of performance and returns. They consider whether a company’s business practices and revenue sources align with their values. How investors define SRI vary according to personal values.
No. 1: Identify your values
To get started, identify the core values you expect to carry over to your investments. You may find that some SRI funds match your values while others do not. As long as you know the values that are important to you, you can start matching your investment dollars with your values.
For example, if you’re passionate about sustainable energy, then your investment portfolio might include investments in wind or solar companies. If you care about supporting the advancement of women, then you might invest in women-owned companies.
Remember, the investments you don’t choose are just as important as the ones you do. This might mean divesting from a company with business practices that may not align with your values.
No. 2: Choose how to build a portfolio
An investment portfolio is a collection of financial instruments. It will often include a mix of stocks, bonds, mutual funds, and exchange-traded funds. There are a few different ways to build a portfolio aligned with SRI practices.
Socially responsible investing with a ready-made portfolio
Some investors opt for a robo-adviser to curate a ready-made portfolio. Robo-advisers use algorithms to build and maintain an investment portfolio over time. Investors can customize some aspects, like their level of risk tolerance. Robo-advisers can be inexpensive when compared to traditional investment advice and many offer SRI portfolios that seek to find ethical investments for you. The main drawback is that a robo-adviser often doesn’t let investors pick and choose individual investments.
Here are a few SRI investment platforms to get started:
EarthFolio is an all-in-one investment platform that invests exclusively in environmental, social and governance (ESG) funds and exchange-traded funds.
Ellevest is a fair-investing platform built by women for women. It offers an investment algorithm that considers women’s unique realities, including the gender pay gap and longer lifespans.
OpenInvest is a values-based financial service that is dedicated to increasing accessibility to socially responsible investing.
SVX is a Canadian company that offers investments with impact. It offers a curated selection of pre-vetted ventures and funds from entrepreneurs to investors interested in cleantech, food, social inclusion, health and wellness, and work and learning.
Wunder Capital is an award-winning investment platform that helps investors support community and commercial solar projects based in the U.S.
Socially responsible investing with a custom portfolio
If you want assurance that every company you invest in supports your personal definition of SRI, then one option is to build your own portfolio. But prepare to invest time and energy. Building a highly customized portfolio will take expertise, research, and patience.
The good news is that an investment portfolio doesn’t have to be complicated. You can build an effective and values-driven portfolio by keeping two criteria in mind:
- Balance your personal risk tolerance. This can be achieved by determining the types of investments you’re most comfortable with, such as stocks (higher risk) versus bonds (lower risk).
- Diversify investment accounts. This can be achieved by choosing different investment instruments or asset classes. Don’t put all your eggs in one basket.
How can you identify socially responsible companies?
Identifying a socially responsible company relies on researching the value criteria of each potential investment. This is especially true for those who want to invest while adhering to certain environmental, social, or religious beliefs.
Here’s a handy checklist to get started.
No. 1: Research
Conduct a deep-dive to determine if a company is involved in anything you deem nefarious. Search for environmental, social, and governance (ESG) criteria to screen potential investments. But don’t take the “ESG compliant” label at face value. The “about us” section of a company’s website is a good place to start. What is their mission? How and who do they profit from?
No. 2: Review ratings
Use an independent research firm to analyze individual investment options. Morningstar is one example of a company empowering investors to make confident decisions backed by research. It provides comprehensive and timely ESG data, including sustainability ratings and carbon metrics.
No. 3: Use a dedicated SRI platform
Use a socially responsible investment platform, such as SVX or Wunder Capital, to curate a ready-made portfolio that aligns with your values. This is often the fastest and easiest way to ensure that at least some of your values are reflected in your investment portfolio.
No. 4: Scrutinize mutual funds
If your company offers a retirement vehicle, like a 401k, be aware that the preselected investments in the mutual fund may not meet your value criteria.
Determining whether an SRI fund option in your plan is the best fund depends on the investor. Speak with an employee benefits supervisor or your company’s retirement representative to explore your options.
No. 5: Compare brokers
Compare your beliefs, values, and standards to those of a potential brokerage. Understand where they align and diverge. You deserve to work with a broker who adds value to your investment strategy. So don’t hesitate to shop around for the right fit.
Why should you consider socially responsible investing?
No. 1: Your values are important
“Investors should consider socially responsible investing if they want to feel confident knowing that their investments align with their morals,” said Wesley Botto, CPA and founder of Botto Financial Planning & Advisory.
Socially responsible investments are measured objectively, Botto said. An investor in an SRI will likely know how their investments are making a real-world impact. For instance, maybe their investment funded an entrepreneur, who is able to launch a new company. Or they funded renewable energy practices — reducing CO2 emissions and effectively eliminating a certain number of cars from the roads.
“Additionally, it makes the investors feel like they are making a difference with their wealth,” he said.
No. 2: You view SRI as a better long-term investment
According to Mitchell Kraus, a chartered SRI counselor, recent SRI investments have outperformed similar non-SRI investments. Of course investment results will differ over time.
“But many investors see companies that are worried about social responsibility as thinking more long term, and therefore, positioning themselves for better long-term profits,” Kraus said.
Don’t compromise your values and beliefs to grow your investment portfolio. Socially responsible investing is a smart way to balance social good with financial returns.
Disclosure: OppLoans is not a registered investment adviser and does not provide investment advice. Please consult a financial representative for investment advice specific to your situation.
Wesley Botto is a certified public accountant and partner at Botto Financial Planning & Advisory. He pursued an undergraduate and master’s degree in accounting. He believes there is nothing better than helping clients properly align their objectives with their strategic actions; his clients include physicians, lawyers, and business owners.
Mitchell Kraus has been helping clients plan for their financial future since 1993. He and his father established Capital Intelligence Associates in 2003 as a comprehensive resource for independent, unbiased advice and trusted financial guidance. He is committed to the principles of socially responsible investing, and as evidence of his concern for the environment, his home is solar-powered and he drives an electric vehicle.