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What Is Socially Responsible Investing?
Socially responsible investing (SRI) is an investment strategy that applies an element of social responsibility in choosing securities to invest in. The goal of SRI is to create positive social and environmental change while still generating financial returns. SRI investing can apply to professionally managed funds, or simply how an individual investor constructs their own portfolio.
SRI investments can range from green bonds to solar energy to fair trade companies. Sometimes SRI is often referred to as "green investing" or "sustainable investing." SRI investing can take into account things like environmental, social, and corporate governance onsideration, which are often referred to as ESG investing factors. Ultimately, a true SRI investment choice is just one that aligns with the societal values adopted by the individual investor.
How SRI Investing Works
Socially responsible investors often seek to avoid companies that are considered to have negatives impact on the environment or society. Out-of-bounds stocks could include those involved in the production of alcohol, tobacco, gambling, weapons manufacturing, or adult entertainment. On the flip side, socially responsible investments include companies that make a positive impact or provide a strong environmental return.
One common way to invest in a socially responsible manner is through impact investing. Impact investing is a type of investment that seeks to generate positive social or environmental impact along with a financial return. Impact investors typically invest in companies or projects that are working to solve social or environmental problems.
If you’re interested in socially responsible investing, there are a couple of things to keep in mind. First, it’s important to align your investment goals with societal and environmental values that you believe in. Second, you need to decide what type of SRI strategy is right for you. There are many different ways to invest in a socially responsible manner, so it’s important to find the option that best fits your values and the beliefs you're trying to uphold.
Socially Conscious Investing Companies & Stocks
Deciding which investment choices qualify to be solid SRI options can be subjective. Many investors decide to consider the ESG reports that companies produce each year to assess if a given company is living up to ESG claims or expectations. Third parties also create ESG rankings that investors can choose to make decisions from.
Investors may not have to sacrifice return potential in order to create an SRI strategy. Many of the largest and most successful companies are considered to be strong SRI investments.
Ultimately, the decision of what investment aligns with the personal ethics and values of any particular investor is completely up to the investor. For instance, some investors may want to steer clear of companies that have been known to exploit international employment standards, which they may consider unethical, but might be okay with companies that produce alcohol.
Socially Responsible Funds List
Another investing option for those looking into an SRI strategy is to invest in mutual funds or ETF that has an eco-friendly or socially responsible investing focus. These investments are typically chosen based on the third-party ESG ratings, or the funds will have a specific purpose that they invest based on.
Note: SRI mutual funds and ETFs will tend to avoid all stocks in companies whose ethical standing is debatable.
There are many different SRI funds to choose from, and each has its own unique set of criteria. Some SRI funds only invest in companies that meet specific environmental standards while others only invest in companies that have good social and governance practices. When considering an SRI fund it’s important to research the fund’s criteria and performance to make sure it’s a good fit for your investment goals.
Here are some examples of socially responsible funds:
Vanguard FTSE Social Index Fund Admiral (VFTAX)
1919 Socially Responsive Balanced Fund (SSIAX)
iShares MSCI Global Impact ETF (SDG)
Parnassus Core Equity Fund Investor Shares (PRBLX)
Parnassus Mid Cap Fund Investor (PARMX)
iShares Global Clean Energy ETF (ICLN)
WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE)
SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX)
Can an SRI Strategy Be Profitable?
The short answer is that yes, some SRI strategies have been proven to be profitable and render decent returns, but no investment is guaranteed to have strong returns. Additionally, choosing a full SRI-only investment strategy is likely to eliminate some potential big wins in your investment portfolio because part of the market is closed-off from being an option.
Many ETFs and mutual funds have prospered as full SRI-only investment funds, providing large returns over a long period of time. This is proof enough that this type of investment can be profitable as long as you apply not just the ethical standards that you have but also a strong investment selection strategy to make a portfolio profitable.
ESG vs. SRI Investing
ESG refers to environmental, social, and corporate governance investing. Companies with a strong ESG rating are active in their focus on either limiting negative social and environmental impact or delivering benefits to society or the environment. An example of an ESG investment would be a company that converts its corporate fleet to all-electric vehicles or its corporate locations to use only renewable energy sources.
ESG is similar to SRI investing but it can be different. For example, ESG typically takes into account the environment first while SRI takes into account the ethical standards and how the potential investment impacts society with its business governance. Both are trying to accomplish something noble, but each has its own primary goal. Additionally, many SRI investment choices also include ESG ratings as part of their analysis in choosing the right investments.
How To Build an SRI Portfolio
There are multiple ways to go about building an SRI portfolio but we’ll focus on the basics of how to get started. Here are the main steps to follow when trying to align a portfolio with a specific SRI investment strategy:
Step 1: Choose The Right Ethical Standards
Before choosing investments it’s important to have the right ethical standards and rules that the portfolio is going to base investment choices on. The right standards could greatly vary by the individual investor so no two SRI investment strategies are going to align and look exactly the same. Writing out these rules makes it easy to evaluate any potential investment choices.
Step 2: Research Potential Funds
Choosing the right exchange-traded or mutual funds that align with the chosen SRI strategy could make it a lot easier to invest large amounts of money and diversify it across multiple investments. Finding the right funds and investing in those is the fastest way to build the SRI portfolio and it should be at least a part of any SRI investment strategy. Create a list of funds that the portfolio wants to invest in.
Step 3: Evaluate Potential Stocks
The process of finding a variety of individual stocks that align with the portfolio’s SRI goals could take a while but the next step is to research potential stocks and see if each aligns. If a portfolio already has investments, and the investor is wanting to shift investments to a new SRI strategy, each individual stock will need to be evaluated to determine if it aligns with the new strategy or not. Create a list of stocks that the portfolio wants to invest in.
Step 4: Fund the Investment Account
Now that there is a list of both funds and individual stocks that the portfolio is ready to invest in, the investment account itself must be created and/or funded. Then each investment can be chosen and shares can be purchased so that the portfolio is now implementing the SRI investment strategy.
Step 5: Continuously Monitor Investments
The work isn’t done when the portfolio is aligned with the current SRI strategy. Since the ethical standards are unique to this portfolio, each individual investment will have to be monitored over time. Any of the individual funds or investments could stop aligning with these standards at any time so it’s important that each is monitored to make sure the SRI investment approach continues to align with each security.
Bottom Line
SRI, or socially responsible investing, is a strategy that aligns a portfolio of investments with the ethical standards of the investor. This has become a popular approach among many investors because it can push businesses to be more ethically responsible while still providing a nice return on investment. The first step to creating an SRI investment strategy is to decide on the specific ethical standards the portfolio wants to live by.
