Socially Responsible Investing: What You Need to Know

September 8, 2016

If you give a lot of thought to protecting the environment, sustainable lifestyles, and making a positive impact on people’s lives, why not carry your socially responsible principals into your investing style as well? There is a class of mutual funds that have been established to reflect your values. Socially responsible investing--the sustainable, responsible, and impact investment (SRI) funds--directs your investment dollars towards your aspirational goals.

The Basics
For many years, there have been special funds that avoid the common “sin” stocks like tobacco, liquor, and gambling. These funds have been popular with religious groups and sects that have a strong moral obligation not to invest in objectionable businesses. Some folks don’t want their money channeled into enterprises they find offensive and most non-SRI funds will buy any company that's within their benchmark. If you invest in most mutual funds, some of your money may be invested in a business you may not support.

In recent years new funds have proliferated targeting environmental, political, and social justice issues. If you think the big oil and coal companies are ruining the environment and contributing to climate change, you can invest in a green fund that prohibits investments in hydrocarbon based industries. If you think companies are profiting from exploiting farmers in underdeveloped countries, you can find funds that support sustainable development. There are socially active funds that support women’s issues and politically sensitive funds that support ideologically-motivated investments. One not-for-profit advocacy group has a fund screening tool that you can use to identify investment options.

Ask the Right Questions
Here are some thoughts on choosing an SRI fund that reflects your values while offering a good investment choice:

  • Does the fund match your objectives? Does the fund’s investment policy restrict investments in the companies or industries that you find objectionable? If you would like to support a sustainable environment, do the fund’s investment objectives align with your goals? You may have to request and read a prospectus (an official document describing the goals, risk profile, and other facets of the fund) to find out what the fund’s investment goals include.
  • Are you getting a good return on your investment? Check the performance history of the fund and see if the returns are comparable to other funds in the same class of investments. You may think that an SRI fund would not perform as well as a regular fund, but some folks think that responsible investing pays off in the long run.
  • How much are you paying in management fees? Specialty funds cost more than regular funds but there is no need to be overcharged for your preferences. Fees should only be slightly higher than other funds.
  • How large is the fund. Many of these funds are new and have only small amounts of money under management. A small fund can have volatile returns and high expenses.

There's no reason your values can't be reflected in your investments--just make sure your socially responsible investments aren't wreaking havoc on your bottom line the same way you think standard mutual funds are wreaking havoc on the planet. To get started in socially responsible investing, you'll have to do some research and target your investments into funds that express your views while achieving a decent return. These funds are generally not marketed like the big investment funds so you have to do some digging. As always, request a copy of the prospectus and read it carefully before investing.

Do you have questions, thoughts, or opinions about socially responsible investing? Leave them in the comments!