Invest Responsibly: What Is Socially Responsible Investing?

People are now becoming more conscious of the impact of the choices they make in their everyday lives.  From carpooling to buying locally, people everywhere are trying to become better citizens and stewards of the world we live in.

But even the most socially-conscious among us might feel some trepidation when they have the option to extend their activism to their nest egg.

With the advent of robo-advisors, which allow you to easily invest your money online or using apps, it’s easier than ever to invest your money in companies that operate in socially responsible ways. But when you’re thinking about where to invest your money, traditionally your biggest concern should be whether you’ll see that money grow – especially if you’re investing in your retirement. Do socially responsible investment portfolios perform up to snuff, or does no good deed go unpunished? Here’s what the experts say.

What Is SRI?

Socially responsible investing, or SRI, is an investment strategy that involves maximizing the money invested into companies that operate in ways that are considered to have a positive impact on society, while minimizing investments in companies that are considered to have a negative impact on society, Fred Egler, licensed financial professional at the online investment company Betterment, said.

“Investors can use SRI to align their personal beliefs and values with their investment strategy,” he said.

For example, with an SRI-focused portfolio, investors might avoid companies that do business in industries such as fossil fuels, tobacco or firearms, Egler said.

What Is a Socially Responsible Company?

“Socially responsible investing portfolios increase their exposure to companies that have a positive impact on the environment, society and corporate governance,” Egler said. “A few examples may include Microsoft, Proctor and Gamble, and Disney. Conversely, this strategy may exclude companies like Chevron, Walmart and Pfizer due to their negative impact on those same categories.”

How is a socially responsible company different from one that has a negative or even neutral impact on society? How is a company’s impact even determined?

“Measuring just how much social impact a portfolio has is tough to do but can be done using an industry standard called an ESG score,’” Egler said.

ESG scores consider how well companies perform in three areas: environmental, social and governance.

A company’s environmental impact might be determined by factors such as whether it utilizes sustainable business practices or if its leaders have committed to reducing its carbon footprint. Social impact concerns the company’s attention to diversity, its effect on the communities in which it operates and other human-related factors. Governance refers to how the company is managed and considers factors such as employee compensation and employee relations.

However, while some companies simply make good social practices a part of their operating policies, investors can also choose to invest their money more directly with companies that offer products or services that work to enact change in the world. For example, if you wanted your portfolio to reflect your environmental beliefs, you might invest money in companies that create renewable energy technologies.

Types of Socially Responsible Investing

Depending on what your areas of interest are, SRI can mean something different to everyone. The point of SRI is to tailor your portfolio to the issues you care about.

According to Natalie Rix, communications director for Swell Investing, an online investing platform that focuses solely on SRI, there are a few different ways you can participate in this type of investing: negative screening, ESG and impact investing.

Negative screening means avoiding investments in companies that have a perceived negative impact on society – such as companies that sell weapons or market addictive products like cigarettes. ESG looks at a company’s ESG score and decides whether to include it based on its ESG policies.

Impact investing, the option Swell focuses on, takes more of an active role in SRI, investing only in companies that are actively working to solve global challenges.

“Impact investors seek a double bottom line – meaning they are looking for their investments to achieve both positive social and environmental good and a financial return,” Rix said.

You can even use your investment portfolio to reflect your religious beliefs. For example, robo-advisor Wealthsimple offers a Halal investment portfolio that invests in companies that reflect Islamic principles of investing, which prohibit profiting off debt or investing in companies in industries like tobacco or gambling.

Is It Worth It?

There’s always some risk involved anytime you put your money in an investment. Potential socially responsible investors might be wondering if their investments will have enough of an impact to be worth it.

“According to a recent Swell Investing analysis, for every $100,000 invested in the S&P 500, $10,000 goes toward the stock of companies involved in the fossil fuels, tobacco and firearms industries,” Rix said.

By investing in companies that align with your personal beliefs, you could potentially be keeping a significant amount of money out of the hands of people whose businesses you believe have a negative impact on society.

Even if your investments don’t make a huge impact on their own, it can still be important and fulfilling to know that you’re living out your beliefs in every aspect of your life.

“Deciding whether socially responsible investing is for you is a personal choice,” Rix said. “But, many consumers who always recycle, drive electric cars and make positive choices for their health want to make sure that their investments align with those choices.”

Do SRIs Perform Well?

“You might expect a socially responsible investing portfolio to underperform standard investment benchmarks significantly, however, this is not the case,” Egler said. “At Betterment, we have found our socially responsible investing portfolio to perform similarly to our core portfolio offering.”

Every investment comes with risk. If you’re interested in SRI but are worried about the potential risks, talk to your portfolio advisor about what companies your money would be vested in, and whether there are ways you can personalize your portfolio to balance out risk in a way that is comfortable for you.

“Obviously there are no guarantees in investment performance, but we set out to construct the portfolio so that there are not considerable differences,” Egler said.

How Do I Start Investing Responsibly?

“Due to the more active nature of this strategy, socially responsible investing has been expensive for investors to implement in the past,” Egler said. “Nowadays, though, it doesn’t have to be.”

Many robo-advisors now offer SRI options for those who want to invest in companies that put a focus on having a positive impact. Many of the big platforms – Betterment, Wealthsimple and others – offer SRI as one of many options for investing. Other platforms, such as Swell, focus specifically on SRI.

If you are already working with or want to work with a more traditional investing company, you can bring up your interest in SRI to your advisor when you’re deciding on your portfolio strategy.

A Portfolio That Reflects Your Values

Whether it be the environment, equality, access to clean water or another issue, if you care about improving the world in some way, your investment portfolio is a great place to solidify your commitment to an issue and put your stamp of approval on the companies you believe are doing their best to make the world a better place.

What are your thoughts on SRI? Share them in the comments below!

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