Put Your Money Where Your Principles Are

Socially Responsible Investing (SRI) is a strategy for investing in companies that align with your values. The SRI approach is to support companies that have a positive social impact. SRI is a growing investment approach, particularly with younger investors. SRI investors typically reflect the social and political issues of the time.

For example, if climate change is a concern, your investments would focus on alternative energy companies and exclude fossil fuel stocks or funds.  SRI investments are made by individual stock purchases or through funds that are specific to the cause.

SRI is about what companies you support and what companies you don’t. Exclusion is a primary focus for SRI investors. Depending on the investor’s social consciousness, tobacco, alcohol, or opioid producers might be excluded. Socially responsible investments lean toward companies supporting social justice or sustainable products.

Like any other investment strategy, there is risk involved. The stocks or funds you choose are not guaranteed to produce a return. An investor’s goal is to make money and the exclusions can disallow profitable assets. Oil and gas, for example, are seeing a travel boom as pandemic restrictions are lifted. The ratio between investment yield and investor values requires balance and commitment.

Environmental, Social, and Governance (ESG)

Socially responsible investors aren’t simply focused on products or goods. They are looking for companies that reflect the current issues of the day.  ESG is an evaluation of a company’s management practices, sustainability, and positive community impact. Using this approach may produce better yields, but they may not perfectly align with the goals of SRI investors.

The Environmental metic is about the company’s commitment to the planet – carbon footprint, waste, etc. Relationships are the focus of the Social metric. It is an analysis of how the company engages with employees, customers, and the community where it operates. Governance as a metric measures a company’s leadership, including executive pay and shareholder rights. Governance reviews the controls over a company’s decision-making.  Companies with a history of bad behavior or violating their own protocols are not good investments.

Be Aware

In 2020, the U.S. Labor Department in the previous administration issued a mandate to force fiduciaries of retirement plans to invest solely based on financial performance. This could exclude companies that meet ESG criteria or interest socially responsible investors.  Your 401K may be invested in companies that go against your principles. The current administration has indicated they will not enforce the regulation. But it may be difficult to weed out companies in those accounts. They are mutual funds run by investment managers. Shareholders (especially through an employer) have very little control.

Socially Responsible Investment Methods

SRI is also known as socially conscious investing, sometimes sustainable investing. Depending on your current situation there are different ways to approach shifting to SRI.

Greenwashing

If you already have a portfolio, the first step is to look at what stock or funds it contains. The goal is to find companies or industries you’re supporting that don’t align with your values and remove them. This process is called “greenwashing.”  You remove all your existing holdings in companies that don’t support your values.

Sustainable Investing

Sustainable investing uses ESG to support a broader range of investments.  For example, automobile manufacturers which embrace electric vehicles could be included in an SRI portfolio. Though their current line-up, i.e. SUVs, contribute to global warming – the shift in mindset is valued by investors. Using ESG guidelines, investors can sort through claims of good governance and choose assets that are actually embracing their goals.

Triple Bottom Line Investments

Triple Bottom Line (TBL)  investments use three metrics: People, Planet and Profit. Companies that fall into this category think there needs to be more than just one bottom-line focused on profit. TBL looks at corporate profit, how socially responsible they are, and whether they are environmentally responsible. Allegedly, they assign the same value to all three areas. But it can be difficult to determine if they are following their own rules. There have been a few instances when companies put profit over principles. There are hundreds of TBL companies, so it’s good to explore their history before choosing.

Impact Investing

Impact investors support companies that are doing good works. This is not about exclusion as much as it is about seeing an actual benefit to social or environmental causes. Examples might include wind farms or companies that offer higher worker wages, like Costco and REI. Impact investors don’t want promises. They expect to see evidence of outcomes.

Like every other investment, SRI includes risk. The market is affected by many factors, much outside of corporate control. Though all forms of socially responsible investing care about profit, more emerging companies may require time to generate consistent yields.

Find Socially Responsible Investment Opportunities

The first step is to evaluate your values. What is important to you? Where do you draw the line in terms of investment? That’s going to vary from person to person. For some people, excluding gun manufacturers is a priority, for others, it’s Big Tobacco.  Whatever the cause, these values will define the parameters for your investments.

Common Priorities for SRI Investments

Social Impact Environmental Impact Governance Impact
Poverty Alternative Energy CEO pay & Bonuses
Affordable Housing Electric vehicles Worker wages
Racism Carbon Footprint Political contributions
Gun Violence Recycled/Sustainable resources Community engagement

 

It’s helpful to give some thought to how you want to approach your investments. For some people, sustainable investments following the ESG Model is the best approach. Impact investing is where shareholders see tangible movements toward their goals. TBL is the middle ground, but more due diligence is required. If you’re already an investor, the first thing to do is assess your portfolio and exclude assets that aren’t aligned with your priorities.

New Investors

It’s important to remember that SRI is one piece of advancing the goals that you support. Choosing stocks and funds can be complicated. Large corporations have many divisions – some will align with your priorities and some won’t.

For example, Ben & Jerry’s Ice Cream has always been a social justice advocate. The company has recently been bought by Unilever.  Unilever is noted for extremely high CEO pay and has faced allegations of child labor. The question becomes can you support the ideals of the one without supporting the actions of the other?

Again, it’s important to think through the deal breakers in your strategy. The Forum for Sustainable and Responsible Investment is a resource for decision-making and even offers a free class on SRI investing.

Open an Investment Account

Any brokerage will offer access to SRI investments. Some offer their own socially responsible funds, like Vanguard and Charles Schwab. It’s your responsibility to see if those funds line up with your priorities.

The real decision is whether to actively manage your portfolio or take a passive approach and use a robo-advisor.  If you are an experienced investor, you may want to handle buying and selling on your own. If this is your first experience, a robo advisor is a good way to start and the fees are generally lower.

(Read: What is Passive Income? Work Less, Earn More)

Populate Your Portfolio

When you’re choosing assets, it’s important to research a company’s history. This can take some time, but if you’re committed to the cause – it’s a requirement.  Look at Morningstar’s sustainable investment resources to evaluate the funds or stocks you choose. If you’re considering a robo advisor, you can check the funds they manage as well.

Keep a balance in the portfolio including a smaller percentage of individual stocks to relevant funds. Mutual funds and EFT funds bring immediate diversity to your account. That said, the fees are higher and decisions are made by the fund manager. Mutal funds are mostly static investments with infrequent buying and selling. EFTs are more dynamic. They contain stocks that are often traded. It may be harder to keep track of what assets are in the fund.  It’s important to stay on top of your investments, no matter how they are managed.

You can look through the fund prospectus on the broker’s website. It will show you the list of companies included in the fund and the expense ratio. An expense ratio is a percentage-based fee you pay for investing in the fund. Consider both carefully and check back to make sure there haven’t been any changes.

Do Socially Responsible Investments Make Money

There is tremendous growth in the SRI space. Trillions of dollars are making their way to assets trying to address social and environmental issues.

The figure below from US|SIF Global Report shows the level of investment for different methods.

growth of SRI investment

But are these investments profitable? It depends on who you ask. Because there are political and cultural ramifications to these investments, opinions vary widely. The rising impact of climate change, gun violence, and income inequality sit squarely on the divide of American politics.

Morgan Stanley’s Sustainable Reality report in 2019 identifies sustainable investments as a way to lower risk. They also found that these investments performed as well and sometimes better than traditional funds.

Here is the closing statement on their report:

profitability on SRI

A simple way to check the value of a stock is to visit the NASDAQ’s market activity page. That will show you the current status of the stock. For historical value, you can use this tool at Marketwatch.

The value of assets in your portfolio will fluctuate – it’s the nature of the market. But being a socially conscious investor is not a losing proposition. Where you invest is your decision. Do your homework and invest where your priorities and profit margin meet.

Summary for Socially Responsible Investing

The trend in stocks and funds that support SRI and ESG investments is growth. Millennial investors and GenZ investors are more inclined to enter the market in that space. Bringing younger investors into the mix is a benefit to the market’s long-term health.

The social and environmental issues of the day tend to shift. In the 1960s, women’s rights were just coming into the mainstream. Civil rights and anti-war sentiments were huge social issues. Today’s priorities include the impact of climate change and income inequality. Second Amendment rights and religious freedom are also at the forefront. Though SRI is driven by the politics of the day, it’s not partisan. There are funds that represent many different value sets.

To recap the approach:

  1. Decide on your priorities. Know where you can bend a bit and what constitutes a deal-breaker.
  2. If you have an existing portfolio, check the stocks and/or funds in the plan. Just by green-washing those investments, you’re making a socially responsible choice. Replace the excluded asset with new stocks or relevant funds.
  3. Pick a mode of investing – active where you buy and sell on your own or passive with a robo-advisor. Open the appropriate account.
  4. When you invest in a mutual fund or EFT fund, make sure you check the companies in the fund and the expense ratio. You can find them in the prospectus. EFT funds tend to trade regularly and will require more monitoring.
  5. SRI investing has shown itself to be profitable but manage your expectations. Emerging technologies may require a longer commitment to show a good yield.

Putting your money where your principles are is good for the economy, the community, and your own well-being. Doing good things makes a person feel good about themselves. Socially responsible investing hits that mark.

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