Socially Responsible Investing: What You Need to Know

August 7, 2018

If protecting the environment, leading a sustainable lifestyle, and making a positive impact on the lives of others are causes you care about, why not apply these socially responsible principles to your investment strategy as well? Well, you can do just that with socially responsible investment (SRI) funds.

According to Investopia, an investment is considered socially responsible due to the nature of the business the company conducts. Common themes for socially responsible investments include avoiding companies that produce or sell addictive substances (like alcohol, gambling, and tobacco), as well as seeking out companies engaged in social justice, environmental sustainability, and alternative energy/clean technology efforts. Socially responsible investments can be made in individual companies, or via a socially conscious mutual fund or exchange-traded fund (ETF).

A Short History of SRI Investing

The roots of SRI investing date back more than 200 years to the money management practices of the Methodists. Believing it wrong to profit at the expense of others, the founder of the Methodist movement urged his followers to avoid partnering or investing with those who earned their money through alcohol, tobacco, weapons, or gambling—essentially establishing unofficial social investment screens. While the Methodists and members of other faiths applied principles such as these to their investments through the years, it wasn’t until the 1960s that socially responsible investing vaulted forward as an actual investing discipline.

It was during the '60s that dissatisfaction among young people led to protests against the Vietnam War and boycotts of companies providing weapons and other supplies. At the same time, civil rights and racial equality rose in prominence.

The 1980s ushered in several mutual funds that catered to the concerns of socially responsible investors. Their screens included the basic concerns of the Methodists—weapons, alcohol, tobacco, gambling—as well as modern issues like nuclear energy, environmental pollution, and the ethical treatment of workers. By the 1990s, SRI mutual funds had grown significantly in popularity, and the activism that led to the development of specific screens and proliferation of dialogues with companies with questionable corporate behavior propelled the growth of community investment, another major element of the socially responsible investing movement.

The present day finds us experiencing an acceleration in positive approaches to sustainability challenges via a sort of "SRI 2.0"one of those approaches being impact investing (which involves one implementing an investment strategy that aligns with his or her values). With the rise of modern day issues such as income and wealth inequality, public health, and climate change, these and other trends in the SRI investing world will only continue to become more prominent.

Ask the Right Questions

Have you decided that SRI investing is the right approach for you? Here are some questions to consider when choosing an SRI fund so you can both exercise your values and make a good investment decision:

  • 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're committed to supporting a sustainable environment, for example, do the fund’s investment objectives align with that goal? You may have to request 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 to see if its returns are comparable to other funds in the same class of investments. One might assume that SRI funds don't perform as well as regular funds, 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 that doesn't mean you should be overcharged for your preferences. Fees for SRI funds should only be slightly higher than those for other funds.
  • How large is the fund? Some SRI funds are new and have only small amounts of money under management. A small fund can have volatile returns and higher expenses.

There's no reason your values can't be reflected in your investment strategy, but do your due diligence to ensure that your socially responsible investments don't wreak havoc on your bottom line by seeking out funds that align to your values while also achieving a decent return. Happy investing (and cause-fighting)!

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