Investing > What is Socially Responsible Investing?

What is Socially Responsible Investing?

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Socially Responsible Investing, or strategies where investors take a company’s social and governance policies into consideration, grew to over $30 trillion in 2018, according to the Global Sustainable Investment Alliance.

This number is set to continue gaining traction as many investors begin demanding more transparency and insisting on making socially responsible choices as a result of illegal investment deals gaining more ground in the news.

On top of advocating for the environment, socially responsible businesses are expected to have fair policies that look out for the well-being of employees, create products that cause no damage to people or the environment, and avoid unethical business practices.

Once a strictly niche approach that was thought to be more about sustainability than returns has now come to the forefront as a market-beating strategy. And as investors realise more and more its benefits, some have begun arguing that company’s can no longer thrive with SRI ratings.

Although this is all positive news for SRI investors, others do argue whether SRI is the best investment strategy. Unfortunately, if it were that easy we’d all be doing it, right? Though SRI investors likely have a good opportunity to earn solid investment returns, all businesses have highs and lows.

In this article we will:

  • Tell you the benefits of SRI
  • Show you how it performs in comparison with non-SRI funds
  • Highlight the risks of an SRI strategy
  • Advise you on the best robo-advisors and funds to help get your SRI strategy underway

Overview & Summary

  1. Socially responsible investing (SRI), also referred to as sustainable, responsible and impact investing, is an investment that is thought to be socially responsible due to the company’s policies and business practices.
  2. Socially Responsible Investing began sowing its root hundreds of years ago. As far back as the 1700s, members of the Religious Society of Friends – otherwise known as Quakers – stood against the slave trade and weapons of war and therefore refused to invest in them. 
  3. There are several research studies that have shown companies with strong social corporate responsibility policies are solid investment opportunities.
  4. To help promote their social and political goals, socially responsible investors use these 4 key: Negative screening, positive investing, community investing, shareholder action.
  5. There are many benefits to creating an SRI strategy including standing up for what you believe in and promoting change by investing in fair and responsible companies.
  6. Beware not to let the socially responsible aspect override performance and make sure to look further into any companies claiming to be socially responsible, because it doesn’t necessarily mean they are.
  7. If you think becoming a socially responsible investor is what you’d prefer then you should put in the work to find the best funds to fit this strategy. We highlight the best robo-advisors and funds to help you do this.
  8. Considering all of the benefits, both personally and globally, in addition to its overall performance as we’ve seen, socially responsible investing can be a strong strategy.

What is Socially Responsible Investing (SRI)?

Socially responsible investing (SRI), also referred to as sustainable, responsible and impact investing, is an investment that is thought to be socially responsible due to the company’s policies and business practices.

Typically, socially responsible investments consider environmental, social and corporate governance (ESG) criteria to help create long-term competitive returns in addition to a positive social impact.

 Socially responsible investors can make investments into individual companies with good social value, or through a socially conscious exchange traded fund, or mutual fund.

What are the Origins of Socially Responsible Investing?

Socially Responsible Investing began sowing its root hundreds of years ago. As far back as the 1700s, members of the Religious Society of Friends – otherwise known as Quakers – stood against the slave trade and weapons of war and therefore refused to invest in them.

A few years later, in 1750, and leader of the Methodist church, John Wesley, wrote a now world known sermon titled, The Use of Money, where he argues against capitalist thought and states that it’s a sin to make a profit at the expense of others welfare.

Specifically, he urges his congregation not to take part in such actions as gambling, usury (loaning money with too high an interest rate) and other industries that use chemicals that can cause harm such as lead and arsenic.

For centuries, socially responsible investors prioritized avoiding mainly industries that were seen as to be a sin, like tobacco, gambling and liquor. However, as with everything, change was inevitable and by the time the 1960s hit investors began looking into promoting human rights issues including feminism, civil rights, and works rights.

One of SRIs most notable achievements took place in the 1980s, when individual investors and institutions stopped putting money into South Africa as a reuslt of its apartheid policy, in other words, it’s strict division of races. The efforts of SRI investors played a significant role in ending apartheid in 1994.

During this time, SRI investing began getting more of a spotlight shone on it, attracting the interest of more mainstream investors. The first known investment advisor that was devoted solely to SRI was Trillium Asset Management, founded in 1982.

These days, Trillium is one of many companies that offer investors socially responsible funds. 

Sustainable-and-Responsible-Investing
Sustainable and Responsible Investing in the United States has seen a rise in popularity in recent years.

Today, Trillium is just one of many companies that offer socially responsible funds to investors. According to the US SIF Foundation’s 2018 Report on US Sustainable, Responsible and Impact Investing Trends, as of year-end 2017, more than one out of every 4 dollars under professional management in the United States – $12.0 trillion or more – was invested according to sustainable strategies.

Why is Socially Responsible Investing Important?

There are several different motivations that social investors could have, such as personal goals and values, institutional mission, and client and target audience demands.

As we see in the history of socially responsible investors, the impact is important. SRI investors believe that their investors should contribute towards the advancements in social, environmentals, and governance policies. 

But they aim for a strong financial performance, too. Some investors embrace social investing strategies to help manage risk and the likely resilience of their portfolio when dealing with issues in the future. Over the long term, some seek financial outperformance; a growing body of academic research shows a strong link between ESG and financial performance.

Is Socially Responsible investing Profitable?

SRI Investing covers a wide and growing range of products and asset classes, spanning not just public equity investments (stocks) but cash, fixed income and alternative investments, like private equity, real estate and venture capital. SRI investors, like all other investors, aim for competitive financial returns on investments.

There are several research studies that have shown companies with strong social corporate responsibility policies are solid investment opportunities. Studies with these findings have been published by Morgan Stanley Institute for Sustainable Investing, Oxford University, Deutsche Asset & Wealth Management, TIAA – CREF Asset Management and the United Nations Environment Programme Finance Initiative, to name a few.

For example, USSIF notes that the Deutsche Asset & Wealth Management and Hamburg University conducted a meta-analysis of more than 2,000 empirical studies, which was the most comprehensive study on this topic. This found that most studies displayed a positive correlation between ESG guidelines and corporate  financial performance.

Sustainability-Focused Funds Beating
Data for Morningstar shows that ROI for sustainable funds are inline with other fund types.

In addition, Morgan Stanley studied almost 11,000 ESG-focused funds from 2004-2018 in its Sustainable Reality report, where it found that its performance was comparable with other funds. The firm stated,

“The returns of sustainable funds are in line with those of traditional funds, while also offering lower downside risk for investors,” It continued,  “What’s more, in an uncertain market, sustainable funds may offer a layer of stability for investors looking to reduce volatility.”

Other Considerations

As socially responsible investments aim to enhance social and political environment they follow this climate closely. This is an important factor for investors to understand because it means that if an investment is based on what society deems to be valuable, then the investment is at risk of that social value changing and potentially dropping either over time, or suddenly.

For this reason, SRI tends to be looked at from the lens of Environmental, social and governance (ESG) factors for investors. This approach takes into consideration the business’s management practices and whether or not they hold sustainable and community values.

Some studies have shown that this approach can reap stronger returns. Comparatively, no studies have shown that investing purely on social values alone has proved to be a successful investing strategy.

For example, as we seen earlier, investors in the 1960s contributed towards feminist issues, civil rights and workers rights. The recent rise in awareness of global warming and the climate crisis has guided investors towards companies that cause no harm to the environment or aim to improve the environment by investing in sustainable energy sources or reducing emissions.

Naturally, these investments avoid industries that cause serious harm to the environment, such as oil and coal mining.

Who Should Consider this Strategy?

Although, as we’ve noted, investors do consider SRI to get an increased return of investment, it is generally a consideration for investors looking to mix their morals with their investments to try and influence some progress in social and political situations, or avoid contributing towards those you don’t agree with. 

For example, investors who believe that tobacco should not be so readily available and contribute towards serious illness and death, you may make a conscious decision to consciously refrain from investing in the tobacco industry. Instead, you might consider investing in companies that produce organic materials that cause no harm to people or the environment.

Investors who want to promote animal rights might refrain from putting money into businesses that test their products on animals. A socially responsible investor may invest in startups that aim to bring more jobs to low income areas.

I’m sure you get the theme by now. So, let’s look at ways you can become a socially responsible investor.

How to Become a Socially Responsible Investor

To help promote their social and political goals, socially responsible investors use these 4 key strategies:

Negative Screening

SRI investors who use negative screening will avoid investing in companies that don’t adhere to their standards. The example we gave about of investors refusing to put money into tobacco companies is an example of negative screening. They will essentially screen out tobacco companies from their mutual funds.

Investors might also conduct negative screening known as divestment which means they will pull all their assets from certain companies because of their business policies or where they do business. This is the strategy that was used in the example we gave earlier when against companies in South Africa in the 1980s.

Positive Investing

While negative screening is an important tactic for many SRI investors, one o f equal importance is positive screening; specifically choosing companies whose behaviour you condone. For example, choosing a company that has signed the CERES principles. This is a code of environmental conduct for businesses created in 1989.

Community Investing

Community investing is another category of positive investing. It prioritizes investing in community based initiatives and company’s, especially in lower class areas.

Investors in this case would prove loans to organizations and even people that would not have been able to attain them otherwise. The loans may be used to fund small to medium business (SMEs) to provide essential services including education and housing. Investors may also prioritize creating more sustainable communities by financing projects such as smart growth and green energy.

Shareholder Action

Not only do Socially responsible investors use their morals and values to guide their investment choices they also try to enact change on company’s they hold stock in.

Sometimes investors do this by filing shareholder resolutions which is an outline of a set of proposals on how they believe management should run the company. A popular example of this is when a request is made for companies to disclose all donations they have made to political campaigns.

The Securities and Exchange Act of 1934 states that all investors or groups with at least a 1% share in a company’ stock (or worth $2,00) have the right to submit a proposal to the company to be voted on during the forthcoming shareholder meeting.

Though the proposal may not always receive the majority vote needed to enact the change, it may still influence the management’s decisions if it gets enough positive attention and support.

Types of Socially Responsible Investments

When it comes to socially responsible investments you will have a wide range of investment options to pick from. Some of these include;

Mutual Funds and ETFs

You can choose between hundreds of mutual funds using ESG criteria. The US SIF publishes a list of over 200 socially responsible mutual funds available from member firms in its website showing information about its member firms financial performance and the criteria used for choosing their investments.

Alternative Investments

Those looking for an alternative to traditional investments, such as property funds or hedge funds are also looking to get into the SRI field. US SIF states that alternative investment funds for SRI are dramatically growing year on year.

In 2012 there were only 177 alternative SRI funds in the US managing around $38 billion in assets. Two years on, in 2014 this number had almost doubled to 336 funds with $224 billion in assets.

Why Invest in Socially Responsible Investing?

Investors using an SRI strategy tend to go hell for leather in their portfolios. What we mean here is, either their portfolio is 100% completely filled with socially responsible funds and stocks, or no SRI targeted funds are there at all. Below we have highlighted some of the benefits of implementing a socially responsible investment strategy.

1. You’re living out Your Values

Okay, so we don’t mean your business brand, we mean you and what you stand for as a person. Tony Simons discusses, in The Integrity Dividend, how people often try to improve themselves by taking on too much at once.

This not only fails, it makes their brand confusing. Simons suggests deciding on a couple of key values and pushing hard on them i.e. living and breathing the very nature of what they are and what they stand for.

So what has this got to do with SRI investing?

If you intend to uphold your values, because they make you you, then one way to do this is through SRI investing. The term put your money where your mouth is is quite fitting here.

If your values are important to you then invest in socially responsible businesses..

It’s hard to say you’re committed to improving the environment when your portfolio includes some questionable industries or  companies that directly contradict this. Investing in socially responsible investing shows that your values are important to you and you’re committed to upholding them in every way. Implementing this approach will enable you to prioritize other areas of your financial goals, like college savings, taking out a mortgage, and eventually, passive or “automated” investing.

2. You’re Standing Up For Good

A lot of people know that injustices are happening but choose to turn a blind eye to it for whatever reason. Maybe they think one person won’t make a difference or maybe they just don’t want to put the time or energy that it would take to effect change into it.

The right choice is not always the easiest choice. SRI investing is an ideal opportunity for investors to stand up for what they believe in.

It’s an opportunity not to enable companies that are misbehaving. If more of us choose to refrain from investing in the culprits, it would make a significant difference in terms of those companies choosing to make better decisions.

3. You’re Promoting Fair & Responsible Companies

It might seem like it wouldn’t be a big deal to refrain from socially responsible investing but by participating in it you are promoting ethical companies for their standards and at the same time, you’re punishing companies doing the wrong thing.

If you believe that some companies should be doing better and making more ethical choices then you need to support the ones that are already leading by example. You can think of it as a kind of reward and punishment way of thinking.

To help achieve this, when more people put money into socially responsible companies, more of these companies are rewarded. In the long-term, this could act as the catalyst for real and important social progress.

For example, let’s look at toy company Lego. In 2014 the company ended its partnership with Shell Oil after a Greenpeace campaign. Now the company partners with companies including the World Wildlife Foundations.

Lego is also working towards using 100% renewable energy by 2030 and has committed to reducing their carbon footprint overall. Not much like this would happen unless individuals funded  it.

4. You’ll Feel Good About It

If you’ve yet to grasp both the personal and global impact that SRI investing has by now then let us say it again. Investing in a socially responsible strategy that compliments your beliefs will make you feel like you are doing something important with your time here on earth. 

Although no ones perfect, it’s good to strive towards making some contributions to good. If you are an investor, or are looking into becoming one, then investing money into things that you believe will enact positive change is one of the best ways to do it. You won’t just feel great when you make money, you’ll feel great about helping to create a better place to live in, too.

The best feeling about taking an SRI strategy is the moment you see companies that you are investing in grow and give you some $$ for it.  Not only does this show you are promoting companies with ethical standards, it shows the company is growing. It’s a rewarding, win-win situation.

With that, you won’t feel annoyed about forking out a bit extra for SRI investments.

The Risks of Socially Responsible Investing

SRI is not as simple as just finding a company with good social ethics and investing in it. Although there are many benefits to it, it is a bit more complex than that and has a few drawbacks. Let’s outline the cons of SRI.

1. Performance Might Fall by the Wayside

Throughout this article, a key concern for you will probably have been performance and return on investment. And it’s true, when you choose a specific niche of company’s per say, you are cutting off a huge segment of possibilities (sad but true) and potentially might need to fork out more to companies that are socially responsible. In turn, you might be giving up on a higher return on investment.

Essentially, the whole goal of investing is to earn the highest profit available. If you fail to prioritize performance in your strategy, and SRI overshadows it, then your finances might take a hit.

2. You’re Cutting Out a Chunk of Strong Investments

To elaborate on the last point, focusing solely on SRI funds or stocks can leave some strong investments behind. Let’s consider the fact that you may come across a company with a lower than average performance on socially responsible ethics but a strong record of producing innovative services and products that help people’s lives and create lots of jobs. Passing on such an attractive option because of your social responsibility strategy might be a losing choice.

The opposite can also be true. Refraining from investing in a company because of its practices might mean you will miss out on the ideal investment for your portfolio. The perfect example to look at is Microsoft, which has been omitted from one of the biggest and most successful socially responsible funds – the Parnassus Core Equity Fund. Manager, Todd Ahlsten said they chose not to invest in Microsoft due to the “competitive dynamics” of the firm.

3. A Company Might Tell You it is Socially Responsible, When it’s Not

When selling things, a big part of it is image. What the customer perceives to be buying into. In some cases, this can be more important than what they actually are buying into.

And for marketing purposes, crafting a reputation for being socially responsible without actually being socially responsible is quite easy to do. A good marketing campaign can convince people of almost anything.

For example, let’s consider the car company, Volkswagen. The Volkswagen brand implies a sense of social responsibility.

Over a long period, it portrayed this in all its marketing by highlighting their cars with “clean diesel” – and portraying this as a safer choice. This became a huge scandal that started a whole unravelling of Volkswagen’s created this persona of being socially responsible.

In 2015, campaigners found that Volkswagen cars have a huge impact in producing lung-damaging pollutants far greater than the legal level permissible. And even more recently, the high court found that Volkswagen installed devices to subvert emissions tests. 

The advice we’re trying to get across here is not to take a company’s word for it that they are socially ethical, and in fact, don’t take their word for anything, do your own research and figure it out for yourself, because marketing sells.

Which Funds Will Help You Be a Socially Responsible Investor?

If you think becoming a socially responsible investor is what you’d prefer then you should put in the work to find the best funds to fit this strategy. 

The easiest way to do this is with the help of a top robo-advisor. Robo-advisors invest and manage your money based on your goals and risk tolerance. Some of the best robo-advisors out there offer some form of SRI investing, including Betterment, a firm that offers SRI alternatives for emerging markets and U.S stocks, and Personal Capital, a firm that puts a focus on ESG metrics. 

M1 Finance  is another great option for SRI investors and have recently published an SRI investing Guide where you can learn how to build a portfolio that matches your values. 

Wealthsimple will invest your money across the whole stock market, utilizing a range of global SRI funds that are screened for social, environmental and governance factors, in addition to performance. They have a neat tool that will give you a quick glance at the available stocks for you depending on your risk tolerance.

Robo-Advisor Best ForSRI portfolio
M1 FinanceFractional shares, portfolio rebalancing, no feesYesOpen Account
Personal CapitalHigh-net-worth clients, hybrid robo-advisorYesOpen Account
BettermentCompetitive pricing, easy to use, clean platform YesOpen Account
WealthsimpleETF investors and beginner investors, SimpleTaxYesOpen Account

If you’d prefer one of the best apps to trade stock from a smartphone for your SRI investing — then the Stash app is an ideal option.

If you’re looking to be more hands on with your investments and take more control of the process then take a look at 5 fund options we’ve chosen that will meet your SRI criteria. 

Given that the S&P 500 is a popular benchmark, we’ve decided to chart out their five-year annualized performances against this. Each fund is analysed during the period of 6/22/18.

Vanguard FTSE Social Index (VFTSX)

The VFTSX fund tracks mid-capitalization and large stocks that have been screened for particular social, environmental, and human rights criteria.

Top 5 HoldingsMicrosoft, Apple, Facebook, Google, JP Morgan
Investment Minimum$3,000
Expense Ratio0.20%
5 year annualized return+14.75%
Compared with the S&P 500 for the same period+0.83%

Parnassus Endeavor Investor (PARWX)

With this fund you can guarantee 80% or more of your capital will be invested in companies that the fund managers  have penned as promoting fair workplaces for employees.

Top 5 HoldingsGilead Sciences, Qualcomm, Micron Technology, Allergan PLC, Mattel
Investment Minimum$2,000
Expense Ratio0.92%
5 year annualized return+16.49%
Compared with the S&P 500 for the same period+2.56%

Calvert Equity Fund (CSIEX)

The CSIEX fund invests in companies that have a demonstrable record of positive social, environments and sustainability practices.

Top 5 HoldingsVisa, Danaher Corp, Google, Thermo Fisher, Microsoft
Investment Minimum$1,000
Expense Ratio1.08%
5 year annualized return+13.69%
Compared with the S&P 500 for the same period0.24

Domini Social Equity  (DSEFX)

The DSEFX fund researches the social and environmental policies of each of its holdings. In addition, it also looks at how much respect companies show for their communities, whether it protects the environment, produces products that are safe and useful, and treats its workers, suppliers and investors with integrity.

Top 5 HoldingsMastercard, Alphabet, Intel, IBM, Prudential Financial
Investment Minimum$2,500
Expense Ratio 1.09%
5 year annualized return+10.35%
In comparison with the S&P 500 for that same period-3.58%

Walden Equity (WSEFX)

The WSEFX fund looks at companies with socially ethical practices for the long-term. This fund not only screens for companies with a positive history of investing in its community, protecting the environment, and treating its employees fairly, it also avoids companies associated with the production or sale of animal testing, weapons, nuclear power, tobacco, gambling and/or alcohol.

Top 5 HoldingsMicrosoft, Apple, Alphabet, JP Morgan Chase, Visa
Investment Minimum$100,000
Expense Ratio1.00%
5 year annualized return+12.00%
Compared with the S&P 500 for the same period-1.93%

The Bottom Line

Considering all of the benefits, both personally and globally, in addition to its overall performance as we’ve seen, socially responsible investing can be a strong strategy.

At the end of the day, it will probably depend on how strong your morals are and whether you want to bring them into the financial market. If you have strong values and the thoughts of contributing to something bigger than you catches your attention, above creating the highest ROI possible, then use the information in this guide to invest in companies that are making the world a fairer place.

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on TheTokenist.io. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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