These days, people are increasingly concerned about our country, its people, and the environment. Government regulations alone are proof of this. Companies continue to improve their sustainability, diversity, and general social responsibility efforts in order to not only comply with government regulations but also appease the public. One way people have demonstrated the importance of their concerns is through investing. They show their support to companies that are doing social good by investing in the stocks and funds of those companies. Out of these acts arose the term socially responsible investing.
What Is Socially Responsible Investing?
Socially responsible investing is an investment approach that considers environmental, social, and corporate governance criteria to generate returns and make a positive social impact.
In the past ten years, the amount of money invested in socially responsible funds has more than tripled, according to the Forum for Sustainable and Responsible Investment. This trend demonstrates that as people become more concerned about society, they’re willing to make social impact an investment focus.
If you consider yourself a socially conscious person and are interested in matching your investments with your values, you’re probably on the lookout for the best funds. One factor to consider beforehand is how socially responsible investing stacks up to other investment approaches. The point of investing, of course, is to see a return on your money.
This leads us to the important question:
Does Socially Responsible Investing Make Sense Financially?
Traditional investing involves measuring strictly tangible metrics such as a company’s sales and profits. On the other hand, socially responsible investing takes into account more intangible factors such as a company’s diversity or environmental impact.
Given this difference, one may assume that socially responsible investing isn’t all that responsible in terms of seeking financial returns. To the contrary, an aggregate study conducted by researchers at Deutsche Asset & Wealth Management and Hamburg University found that there’s a positive correlation between companies’ environmental, social, and corporate governance and their financial performance. Companies that do social good tend to also be profitable and be investment-worthy. Moreover, the results of the study show the correlation is stable over time.
With that, it’s safe to say socially responsible investing is a viable approach. Making investment choices based on personal values doesn’t have to mean sacrificing returns.
How To Choose Investments That Match Your Values
When it comes time to invest, you’ll find you have several options. Your most prevalent option will be mutual funds. Some fund companies that offer socially responsible mutual funds include Calvert (the largest socially responsible investing focused firm), GuideStone Funds, and Parnassus. The mutual funds offer you the diversification needed to be a lower risk investment option while giving you the benefit of owning shares in multiple do-good companies.
Another way to accomplish socially responsible investing is through exchange traded funds, or ETF’s. These ETF’s invest in companies that focus on positive social impact. The main difference between ETF’s and mutual funds is that ETF’s are traded throughout the day like stocks while mutual funds are traded only at the end of the day. Also, you can buy a single share of an ETF while mutual funds typically have a higher minimum investment requirement.
Below are a few examples of socially responsible ETF’s:
- ETHO (Etho Climate Leadership) – This ETF consists of holdings in companies that are climate-efficient and leave the smallest carbon footprint in their industries.
- WIL (Barclays Women in Leadership) – This ETF consists of holdings in companies that have women as CEO’s or board members.
- ORG (The Organics) – This ETF consists of holdings in companies that distribute and/or sell organic foods, cosmetics, and supplements.
For those who want an even more active and involved process, investing in individual stocks is an option. It’s best to do your research when it comes to this type of investing. The book “Low Fee Socially Responsible Investing”, authored by financial advisor Tom Nowak, describes how to buy individual stocks using the socially responsible investing approach.
With any of these options, it’s important to do your due diligence in researching the composition of the funds and the historical performance of the stocks. Here are some additional resources to get you up to speed with the socially responsible investing approach:
- “Socially Responsible Investing for Dummies” by Ann C. Logue
- “The Complete Idiot’s Guide to Socially Responsible Investing” by Ken Little
- “Socially Responsible Investing: Making a Difference and Making Money” by Amy Domini
- The Forum for Sustainable and Responsible Investing (website)
If you find that you need professional advice, you may want to consider hiring a financial advisor to guide you in your socially responsible investing.
Socially responsible investing is a commendable endeavor for any investor. It involves matching your values with your money goals. In fact, research shows that companies that do social good also have a good bottom line too! With the increasing popularity of socially responsible funds and the ability to hand pick your stocks based on company governance, there hasn’t been a better time to make a positive social impact with your investments.