Given the choice, most of us would prefer to do good in the world. So why should investing be any different?
If you are trusting a company with your hard-earned money, it might matter that the company shares your ethical concerns. When the company implements them into their business practices, it contributes to a better world. In addition to helping you sleep better at night, Socially Responsible Investing (SRI) can also be financially advantageous. It is a potential double-win that investors can consider when getting into the market.
What is Socially Responsible Investing (SRI)?
SRI involves vetting the companies you may be investing in to gauge how they operate in the world. Essentially, you are looking to see if the companies share your ethical concerns and that their practices are aligned with your beliefs.
In addition to seeking positive impacts from any potential investments, SRI is also about filtering out any companies you do not want to support for any number of possible issues. These include a company’s environmental record, their stance on social issues, where the company invests its money, political alliances, etc. Knowing a company’s core beliefs and how they operate in the world is a central component of socially responsible investing.
The SRI approach is different for each investor. Some prefer investing in environmentally sustainable companies, Black or female-run businesses, LGBTIQA+ supportive organizations, or any combination of the above. SRI’s goal is knowing that your money makes a difference in the world and provides a solid financial return.
SRI is not a new practice. With more interest surrounding environmental concerns and many other hot-button topics, people want to invest according to their beliefs. SRI has become a popular way to invest in your financial future while also exerting a positive influence on the world.
Alongside SRI, ESG (Environmental, Social, and Governance) investing is another tool to help ensure that your investments align with your principles. With ESG, investors are looking at how a company operates on several levels. This includes environmental sustainability, the company’s efforts to improve social issues in their company and in the world, and how company management helps shape a positive influence.
At its core, ESG investing is very similar to SRI . The idea with both investment approaches is to ensure that the companies you are investing in share your beliefs and concerns. The difference is that an SRI approach you are selecting and vetting companies based on certain positive and negative attributes. With ESG, you are looking at a complete company picture. Does its internal and external practices aligns with your core principles?
Similar to SRI, in addition to the societal benefits, there is often a financial upside to ESG investing. Companies that score well on the ESG scale tend to be very well-run companies that do well in the market.
How to start investing responsibly
You’ve decided to begin investing responsibly – now what? While beginning to invest may seem like an overwhelming experience at first, there are two primary ways to begin your responsible investment journey. Here they are.
On your own
Are you a self-starter? Do you enjoy researching the companies you may be interested in to see if their business practices align with your core beliefs? If so, you can begin socially responsible investing on your own with a do-it-yourself approach.
For this route, you can begin by opening a brokerage account that allows you to buy and sell stocks. From there, you can begin purchasing stocks in individual companies or through SRI mutual funds (or ideally, a combination of the two). Mutual funds include holdings in a wide array of assets that diversify your portfolio. There are many ready-made mutual funds you can begin investing in right away, including options dedicated to certain requirements (i.e. fossil-fuel free companies, companies that support LGBTIQA+ causes, etc).
This approach initially requires a lot of work, but allows you complete reign over your portfolio. In addition, learning how to research company practices and familiarizing yourself with companies that match your ethical convictions is sure to pay off in the long run.
With a robo-advisor
If you want a hand to help guide you through the intricacies of SRI investing, utilizing the services of a robo-advisor is a popular choice. While that may sound fairly futuristic, in practice it’s quite simple: a robo-advisor is an algorithm designed to help you select stocks that match your criteria and needs.
A robo-advisor will curate a collection of investments based on the ethical considerations that matter most to you. This saves you a great deal of time and research; while there is a fee to utilize a robo-advisor service, it more than makes up for it in terms of convenience and knowledge.
Another benefit of using a robo-advisor is its risk management; in addition to selecting your SRI requirements, you can also select the level of financial risk you are willing to take, which will customize your portfolio based on your risk level. For that alone, a robo-advisor can be especially helpful to new investors.
The downside to using a robo-advisor is the lack of customization. If you see a company you would like to include in your customized robo-advisor portfolio, you won’t have the ability to add it to your curated portfolio. If having that flexibility is important to you, a do-it-yourself approach might be a better fit.
Examples of SRI strategies
There are a number of approaches to socially responsible investing. Some of these strategies include:
Negative screening is an interesting approach to SRI; with negative screening, you are essentially weeding out companies that you don’t want to invest in. As with any sort of SRI requirement, you can use filters to to screen out companies. These filters can include everything from tobacco/alcohol companies, gambling, fossil fuels, and many more.
Another option with negative screening is to exclude companies that rank low on the ESG scale. This allows you to pass over companies that have a poor track record on ESG issues, allowing you to curate a portfolio that best reflects your sense of what is most important to you.
impact investing is the best option for those looking to have the largest direct impact an area. The primary goal of impact investing is to effect change; while a financial return is always welcome, in this case, it’s a secondary consideration. As with any type of SRI investing, you can pursue impact investing in any area that speaks to you. That includes environmental sustainability, low-income housing, food security, etc.
Community investing is a component of socially responsible investing that keeps the funds within a particular community. You can invest in your own, although you can always invest in another community in need. The goal is to support and build up local institutions and organizations in the community that may be under-served.
You can invest in the community through particular companies and organizations that operate within the community or through specific packaged assets designated for that purpose. By investing in the community, you can be supporting areas of need including education, infrastructure, and low-income housing.
While on the surface, ESG (environmental, social, and governance) investing and SRI (socially responsible investing) are very similar, there are differences between the two investing approaches.
ESG investing is when an investor investigates a company’s management style and practices to ensure that there is an emphasis on environmental, social, and proper governance approaches. In effect, ESG investing seeks an assurance that a company is being run properly, with an eye to improving environmental and social issues wherever possible. It is still a principled take on investing but it also assures that your investment turns a profit because the company is incorporating best environmental and societal practices into its business plans.
SRI investing takes a bit of a different approach; with SRI investing, you are manually filtering out and selecting companies to invest in based on certain ethical considerations. Those ethical considerations may be different for each investor and may change over time; what makes SRI investing so appealing to investors is the security of knowing that your money is being put into companies with the same ethical beliefs and practices you adhere to.
As with any type of investment, there is no guaranteed path to riches with socially responsible investing. However, a well-curated SRI portfolio can perform very well, especially as more investors are beginning to show an interest in the ethical and business practices of the companies they are investing in. Your best bet is to do your research; whether you choose a DIY approach or use the service of a robo-advisor to help select your stocks, choose companies you believe in with a proven track record and you will be off to a strong start.
The first step to take when beginning a plan for socially responsible investing is to decide which practices are most important to you. Whether it be environmental sustainability, human rights, LBGTQA+ issues or any other tenets you hold close (or a combination of issues), deciding what matters most to you from the companies you are investing in is paramount. From there, you can decide if you prefer to select companies to invest in on your own, invest in an SRI fund, or utilize a robo-advisor or investment planner to help with your choices. At that stage, you can open an investing account and begin to fund your investments. You’re now on the path towards socially responsible investing, which helps to make a difference in the world while hopefully, earning you a tidy profit over time.
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