What is Socially Responsible Investing?

DailyWorth

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I’m interested in investing in the stock market, but hate the idea of supporting companies with unethical business practices. How do I know that my investments are helping to do more good than bad? —Joanna, Philadelphia, PA

Sounds like you are interested in socially-responsible investing, or SRI. SRI is sometimes referred to as "sustainable," "green," "ethical" or "mission" investing. Many of us want to grow our money, but not at the expense of others, animals or the environment. This is a strategy to avoid investing in entities that may promote harmful products, exploit their employees or citizens, pollute the environment and/or violate human rights.

The history of SRI goes back centuries, but its mainstream popularity really began in the 1960’s with anti-war and civil rights activism. In recent decades the movement has gained tremendous momentum and today represents over $3 trillion in total managed assets, a clear indication that many investors like you are as concerned with the impact of their investing as with their personal financial gain.

SRI generally encompasses three focus areas:

  1. Investment in companies and governments believed to uphold certain values and make positive social, political and/or environmental change a priority, and divestment in entities that are believed to have a negative impact. The areas of concern are often referred to as “Environmental, Social and Governance” or ESG.
  2. Shareholder activism. SRI investors tend to be a passionate bunch and interested in doing their part to help create positive change. Shareholder activism aims to promote certain values and influence corporate and/or political decision-making that could have a detrimental impact. This is accomplished through a variety of methods, including conferences, broadcasting, protests, lobbying, publishing and social media.
  3. Community investing makes it possible for local organizations to provide financial services to low-income individuals and capital for small businesses and vital services like affordable housing, childcare and healthcare. This has become a rapidly growing aspect of SRI and involves directing capital from investors and lenders to communities, both local and global, that are underserved by traditional financial services institutions.

Keep reading for more on how to invest.


The most common way to invest in a value-conscious way is to buy SRI mutual funds. There are several SRI-dedicated companies, such as Calvert, Domini, Parnassus, Pax, and GuideStone, and more and more traditional mutual fund companies are including SRI funds in their menu of choices. Lower-cost SRI exchange-traded funds or ETF’s are starting to emerge with current offerings from ESGShares, Powershares and iShares. You can also try buying individual stocks and bonds from certain companies and/or governments using the SRI screening methods described below, and if you happen to have a lot of money to invest, you could consider paying extra for professional management of a SRI portfolio of different kinds of investments.

There are generally three methods of screening an individual company for inclusion or exclusion into an SRI fund; the Negative Screen, the Positive Screen and the Restricted Screen. A Negative Screen, for example, could be a fund manager’s conscious decision not to invest in a company that has any participation in a particular sector, such as tobacco. A Positive Screen is when a manager seeks out and invests only in companies that are involved in a particular sector, like renewable energy. With a Restricted Screen, a manager might still allow a company with questionable activity into the fund if the negative effect is deemed to be minimal enough relative to the other activities of the company.

As with any type of investing, there are tradeoffs with SRI. Practicing SRI can make you feel good that your investment choices reflect your values. However, you should weigh this benefit with the potential drawbacks, including limited diversification (which could translate to higher risk), weaker performance (SRI funds have tended to lag their respective benchmarks and non-SRI peers), higher costs (potentially due to the extensive research required) and shorter history (which could make it harder to gauge future potential).

So, if you are committed to SRI, you should do thorough research to make sure that you ultimately create a portfolio that has the diversification and level of risk that you are comfortable with and the cost-adjusted performance potential you need. Depending on your level of commitment, it may be worth the added cost of paying a financial professional to do the research for you and create an SRI investment plan that is suitable for you.

For more information and SRI resources, including a directory of SRI advisors, mutual funds and separately managed accounts, check out the Forum for Sustainable and Responsible Investing.

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