Is socially responsible investing (or ethical investing) just a buzzword? Today we break down the pros and cons of socially responsible investing(SRI), what is spurring its growth, and whether your diversified portfolio needs an SRI fund or two to bolster your market position.
What is socially responsible investing?
At its core, socially responsible investing merely means putting your investment money into products that support ethical and socially conscious themes. This could be anything from fighting gender and racial discrimination to greening the environment. Typically these products also avoid companies like tobacco and alcohol distributors, coal mining, gambling institutions, and other ‘problematic’ firms. Instead, the focus is on green business processes, environmental sustainability, and clean energy, to name a few common topics.
That’s a rather wide catch-all, isn’t it? That is some of the appeals of green investing, however. It’s not, strictly speaking, a separate product class you need to pursue, but something you can integrate into your existing investment strategy if the underlying concept appeals.
Socially responsible investing is a subset of impact investing strategies. It is the investment approach that seeks to make positive impacts specific issues while generating financial returns.
The goal of impact investing is to make a positive impact on society, and it is increasingly being adopted as a way for investors to both earn returns and make a change in the world. Impact investing often involves funding projects that have a high social or environmental return.
For making socially responsible investments, you can either look to invest individually in companies that offer sustainable business practices, or you can simplify the process (and diversify more easily) by using specially bundled investment products with this theme at the core, often called SRI funds. Today you will find tons of new funds and bundled investment vehicles. This includes:
- Socially responsible mutual funds
- Socially responsible ETF trackers
We’re also in the process of seeing a socially responsible bond package launch through the UK government. So it’s possible to implement SRI investment at all risk levels.
What is the point of socially responsible investing?
The key concept behind socially responsible investing is- quite literally- putting your money where your mouth is. You have the traditional investment goals of growing your money and diversifying your assets. However, you also have a social conscience, and you wish to achieve these goals while working towards a greener, cleaner, and more socially equal planet for all. You’re combining personal financial gain with a broader social impact.
Of course, these two can be mutually exclusive. Just because a company or investment product has green principles does not mean it will automatically grow your finances or provide a good return. As with every investment decision you make, you need to look at the fundamentals and assess their financial outlook before you pay in. Having a socially responsible stance does not negate the need to do your due diligence and choose wisely if you want your money to grow.
Important points to consider
Socially responsible investments are a product of both the social and political climate of their inception. This is an added risk factor investors should bear in mind. If the social value will ‘fall out of favour’ over time, there’s a risk to your investment’s future viability, too.
It’s for this reason that the Environmental, Social, and Governance (ESG) factors for investors were created. This is an investment approach that focuses on the management practices at the company or fund in question, and how it moves forward the goals of community improvement and sustainability. It provides a better benchmark for growth than a focus on social values alone.
Why? Because the ‘social focus of the day’ changes through the decades. Today, many socially responsible companies focus on climate change and global warming. However, if you dial back 60 years, the same umbrella term ‘socially responsible’ would have been more commonly applied to the big causes of the era- the anti-war movement around Vietnam, civil rights, and women’s rights. Of course, these social issues still exist today, and still have great importance in creating a better world, but they have less visibility and thus less impact on trending investments.
At the time SRI funds and similar investment vehicles were first introduced, they were seen as radical. However, it’s becoming more and more common to give these products greater weight in your overall financial planning. 2019 statistics suggest as much as 85% of those investing have an interest in doing so through SRI products.
Examples of socially responsible investing
Examples of socially responsible investing approach include:
- Investing in companies that engage in fair labor practices, such as hiring and promoting employees from underrepresented groups.
- Investing in companies that aim to to reduce the footprint on the environment.
- Investing in companies that has the potential to create long-term economic benefits by creating jobs and strengthening local economies.
- Investing in companies that contribute to charities or philanthropic causes.
The issue of differing values
What I, or the person on the bus next to you, defined as the most important social issues will also vary from your definition of the matter. So, while ‘socially responsible investing’ is a convenient catch-all term, how it’s implemented in individual portfolios can look very different. You may wish to support businesses owned by people of colour, and place a high value on supporting funds that do the same. Another investor may have a portfolio jam-packed with solar power and environmental funds.
This means you will have to do a little more than simply fire up an SRI fund and invest if you truly believe in the underlying principles of socially responsible investing. You will have to make sure that the product you’re investing in aligns with your personal value set. It’s also perfectly possible to practise socially responsible investing through what you don’t invest in. Many, for example, will take care to ensure their investment money does not go towards firms with a poor track record on human rights violations, bad labour practices, or hostility to the LGBTQ community.
Does ‘narrowing the field’ this way means you have less outlook for growth? The stats suggest not. Data from several studies have shown that SRI funds can match- and even outperform- traditional funds. They also appear to suffer less volatility than many traditional funds. As always, it comes down to smart investing in stocks with growth potential.
How do I start socially responsible investing?
If you favour a fully DIY approach, then you can merely begin to select stocks whose SRI or ESG metrics match your goals. Typically the man-on-the-street investor doesn’t want to over-invest in individual stocks, however, unless you are very confident in your financial plan and skills. However this approach has an obvious drawback which it can take a lot of time to evaluate companies and determine which ones are best suited for your sustainable portfolio.
SRI Mutual funds and ETFs provide a greater opportunity for diversification even with lower investment amounts. You will, of course, need to make sure that the SRI funds you are selecting match your own ethics. You may also consider green savings bonds.
Socially responsible investing might not be for everyone, but it’s a valuable way to ‘give back’ to society and the environment while investing. If you feel that ethical investing is an important metric for you, then looking toward socially responsible investment funds and similar products is a fantastic way to grow a portfolio that enhances both your assets and your heart.