How to Align Investments with Values through Socially Responsible Investing
People invest in stocks to make money — to save for retirement or achieve a better return than they would in a savings account. Because of the purpose for which we invest our money, it’s easy to think that our personal values play little role in our investment choices. Investing is just something we’ve been told to do if we want to stop working our 9–5 jobs before we die. However, we can invest in our future while investing in the future when we pursue our investments through a socially-conscious lens (known as Socially Responsible Investing, or SRI).
What is Socially Responsible Investing
Socially Responsible Investing (SRI) is an investing strategy that focuses on 1) making financial gains and 2) supporting companies that align with your values. This alignment may occur with the ultimate mission of the organization (for example, building wind energy infrastructure) or with a company’s day-to-day business practices (for example, paying a living wage to employees).
Each Socially Responsible Investor approaches SRI differently, since no two people have exactly the same values. Someone who is passionate about curbing climate change might choose to invest in alternative energy companies. A person passionate about ending systemic racism might focus their efforts on economic justice and invest in Black-owned businesses.
Socially Responsible Investors also divest in companies that do not align with their values (for example, fracking companies for the environmentally-conscious). In general, SRI is often approached through analyzing Environmental, Social, and Governance (ESG) criteria; that is, screening one’s investments based on how a business holds up in each of these standards.
· Environmental criteria: what practices is the company undertaking to minimize harm to the environment (e.g. responsible waste disposal, conservation of resources, respectful treatment of animals)?
· Social criteria: how does the company interact with its community, including its employees and customers (e.g. pay a living wage, make philanthropic contributions)?
· Governance criteria: does the company manage itself transparently and proactively engage with stockholders (share Board conflicts of interests, have a clear tax reporting strategy)?
Over the past few decades, Socially Responsible Investing has grown in popularity. In 2016, Investment News wrote that “at least $7 trillion [was] invested in strategies focused on environmental, social, and corporate governance causes… up from $3.7 trillion in 2012.” This number grew to $30 trillion in 2018. While SRI is known for being popular among Millennials, people from all generations are expressing interest in “putting their money where their mouth is” and investing in companies that align with their values.
Will you make as much?
Research conducted by RBC Global Asset Management indicates that socially responsible investing does not hurt investment returns. In the past, stock brokers and financial consultants did not always encourage their clients to invest in Socially Responsible Investments due to the perception that they would underperform. You may even still carry that worry with you, having heard something similar in the past.
Despite these misgivings, Socially Responsible Investments strategies tend to perform very similarly to traditional investment strategies. Further, these investments also hold up during market downturns. Some even argue that ESG investing gains may grow as a result of the COVID-19 pandemic.
In some cases, Socially Responsible Investments, especially ESG strategies, have actually outperformed traditional investments. Good Governance (the “G” in ESG) in particular is associated with better returns. The evaluative criteria around Governance is more developed than the Environmental and Social criteria because it has been discussed and compiled for a longer period of time. It also more closely aligns with traditional investment considerations in that it evaluates things like supply chain awareness and risk exposure.
Finally, we turn to one of the most well-known index funds, the S&P 500, to provide a more concrete example. In 2019, a socially-conscious version of this index was created, the S&P 500 ESG Index, which eliminates the majority of “sin” companies that the traditional S&P 500 index includes. The socially conscious S&P index was created to have a similar risk and return to the S&P 500 and, at least over the past year, has actually slightly outperformed it.
Of course, it’s always important to do your own research before investing in any stock.
How do I invest with a Socially Responsible Perspective
Now that you know that socially responsible investments can carry the same risk and return as traditional ones, you may be wondering how to get started.
1. Identify Your Values
No two people have exactly the same values. Make a list of what you deeply care about and the changes you want to see in the world. What initially peaked your interest in Socially Responsible Investing? Are you concerned about climate change? Racism? Affordable housing? LGBTQ+ rights? The growing wealth gap? Animal rights? The list is endless and entirely dependent on your past experiences, ethics, and understanding of what needs to change in the world.
2. Focus on One or Two Specific Criteria to Start
You’ve put pen to paper and identified a bounty of things you care about. Now it’s time to narrow things down a bit. You want to ensure you have bandwidth to conduct sufficient research before making your investments.
You might identify that you’d prefer to focus your investments primarily on the clean energy sector. Or maybe you’re more inclined to focus on divesting in “sin” companies, so you focus on finding socially responsible alternatives to your current investments (switching out traditional S&P 500 for S&P ESG, for example). There’s no “right” criteria — it’s whatever feels right to you!
3. Consider Whether You’re an Active vs. Passive Investor
Do you choose an index or ETF, or do you identify individual stocks with which you feel a personal connection? Either option is entirely sufficient and simply comes down to where you want to focus your investment energy.
It can be helpful to consider whether or not you’re an active versus passive investor. If you want to buy something and forget about it, investing in ETFs or mutual funds (a portfolio manager will do the “active” part for you!), may make your SRI journey more straightforward. If you play a more active role in your investments and enjoy following the growth of individual companies, you might choose a selection of stocks for your portfolio.
The “List of Socially Responsible Investments” below may help get you started.
4. Do Your Research (or Hire a Professional)
As with any other type of investment, financial gains (or returns) are not guaranteed. Before investing in any stock, you should do research to determine whether or not you are making a financially sound investment. This can involve reviewing a company’s annual report (Form 10-K) and quarterly reports (Form 10-Q), or doing a news search to see what others are saying about the company (especially if it’s currently in any “hot water”). If you’re new to investing, it never hurts to hire a professional to help you think through this research and make decisions.
5. Invest
Now comes the easy part! Head to your broker and share a conversation about the investments you’d like to make, or purchase them yourself using an online investment platform.
List of Socially Responsible Investments
Mutual Funds or ETFs
Mutual Funds and ETFs can be good investment options if you don’t care about selecting specific companies in which to invest. A mutual fund is a professionally managed portfolio of stocks, bonds, and other securities. An ETF is similar to a mutual fund in that it’s a portfolio of various investments; however, unlike a mutual fund, ETFs are traded like stocks and their prices are market-driven (rather than driven directly by the values of the assets within the portfolio).
· Top Socially Responsible Bond ETFs for 2021 (Investopedia)
· 5 Large Cap ESG Mutual Funds (The Balance)
· Best Socially Responsible Mutual Funds (Benzinga)
· 15 Best ESG Funds for Responsible Investors (Kiplinger)
· 7 Great Socially Responsible Mutual Funds (Kiplinger)
· 7 Best Socially Responsible Mutual Funds (U.S. News)
· Against Animal Testing? Check Out These Funds (Morningstar)
Individual Stocks
You might prefer to take a more hands-on approach and individually select the specific companies you’d like to invest in. The following is a list of resources that may help you do so. Of course, as mentioned previously, always be sure to do your own research (or hire a professional) before investing.
· Green stocks
· Alternative Energy Stocks
· Environmentally-Responsible Companies
· 10 Earth-Friendly Stocks
· Black-Owned Businesses
· Black-Owned Public Companies
· Vegan StocksGreen stocks
Community Investing
Finally, community investing is another option for socially responsible investors to explore. Community investing is a type of investing which provides capital to low income or underserved communities. For example, a Community Development Financial Institution might provide loans to small businesses or low-income individuals who don’t have a sufficient credit score to secure a loan at a traditional bank. The following are some community investment approaches you might consider:
· Purchase a CD or keep your money at a Community Development Financial Institution
· Invest in a Community Development Loan Fund
It is easy to think of investments as something outside of our control — when we see the stock market start falling, we can’t do anything to reverse the losses, as much as we might like to. But that doesn’t mean that we need to relinquish all control. We don’t have to sacrifice our values for our ROI.
When engaging in such a future-focused activity, it makes sense to focus on societal needs in tandem with our own. By pursuing Socially Responsible Investing, we allow ourselves to feel the satisfaction not only of watching our assets grow, but also watching the society we desire begin to take shape. What future are you investing in?
