In the spring of 2016, hundreds of students across six college campuses organized a protest. Stop investing in the fossil fuel industry, they told their schools, and support environmentally friendly companies instead.
In effect, these students were calling for socially responsible investing (SRI). SRI is the practice of investing in companies that make a positive impact in the world — and avoiding the ones that don’t.
Along with colleges, more individual investors are making sustainability a priority. Instead of supporting harmful companies, you can invest in ones that make the world a better place.
But can SRI give you the same returns of traditional investing — and is it even possible to separate the “good” companies from the “bad?” Let’s consider both questions as we take a closer look at the state of socially responsible investing today.
What is SRI?
Socially responsible investing is an approach to investing that’s guided by ethical goals along with financial ones. By choosing SRI, you support companies that share your values.
In the past, ethical investors avoided companies with a record of unfair labor practices, environmental destruction, or other harmful practices. Some of the first SRI investors took a stand against “sin stocks,” choosing not to invest in companies associated with gambling, alcohol, and smoking.
Today, many SRI investors take a more proactive approach. They seek out companies not just because they don’t do harm, but because they actively work toward a social or environmental mission.
Just as you “vote” with your money when you go shopping, you can declare your values as an investor. SRI lets you support corporate practices that align with your beliefs and keep your money away from ones that don’t.
More firms offer socially responsible mutual funds
If you’re like most people, you’re probably not handpicking your individual investments. Instead, you let an investment management company spread your money around in a diversified index fund.
As interest in ethical investing has grown, more investment management companies offer socially responsible mutual funds and exchange-traded funds (ETFs). Vanguard, for instance, offers the FTSE Social Index Fund. Betterment and Wealth Simple also have socially responsible mutual funds or ETFs.
These investments might be spread across a variety of companies and industries, but each one has been screened for meeting social, environmental, and human rights criteria. Plus, these investment management firms expect these portfolios to perform well over the long term.
Use ESG ratings to handpick your own investments
If you’re a practiced investor, you might also choose your own investments. But you don’t have to do all the research alone.
“If investors are looking to get into socially responsible investing, many brokerages show an ESG … rating for each stock,” said Tom Drake, founder of MapleMoney.com.
Environmental, social, and governance (ESG) ratings assign grades to companies based on their performance in several key areas. According to the Forum for Sustainable and Responsible Investment, ESG criteria include facors such as:
- Clean technology
- Water use and conservation
- Board diversity
- Anti-corruption policies
- Community development
- Human rights
- Workplace safety
By looking at the rating, you can pick businesses that meet certain standards of social responsibility. If you prefer an active investment approach, you can use ESG ratings to participate in socially responsible investing.
Critics suggest there are no clear guidelines
Although you might like the idea of investing in the social good, critics of socially responsible investing say there’s no consistent way to do so.
Henry Blodget wrote in The Atlantic that SRI doesn’t have a single definition. Different people value different things.
In other words, the meaning of social responsibility varies from one person to the next. Some investors might put their money into solar energy to protect the environment, but others might invest in traditional energy sources to preserve certain jobs. Others might pick companies that share their religious or political beliefs.
Since people don’t share the same values, a common definition for SRI remains out of reach.
Not only can people disagree about what is or isn’t socially responsible, it’s tough to measure a company’s success toward its social mission.
“The biggest discussion stays around the question of how to quantify the impact created,” said Catherine Yushina, co-founder and COO of Startwise. “How do you measure environmental and social impact of the business you invested in?”
If you’re just looking at profit, you have a clear sense of how well a company is doing. But when you bring complex social objectives into the equation, it’s harder to measure success. As an investor, it can be difficult to measure your return on investment in terms of social good.
Although questions remain about socially responsible investing, the practice seems to be here to stay. As it develops, guidelines for social responsibility might become more consistent across industries.
Can socially responsible investing pay off?
Traditional investing is all about the bottom line: You invest your money in the stock market for the purpose of seeing returns in the future. If you exclude certain profitable companies because of their practices, can your investments still pay off? Some critics argue that your returns will be lower and fees will be higher.
In The Wall Street Journal, Dr. David Vogel wrote that while some social investment fund strategies and socially screened portfolios have succeeded, most haven’t. He said that in the past five to 10 years, 65 percent of socially screened funds have seen lower average returns than more traditional funds.
But proponents of SRI say the opposite is true:
“The interesting thing is that many socially responsible companies are undervalued,” said Drake. “Because of this, socially responsible investing has the potential to outperform the market, so investors don’t have to sacrifice their returns to invest ethically.”
Although there’s no clear consensus about the output of SRI, the past few years show that investors care about making a positive social impact. When it comes to SRI, the bottom line isn’t only about money — it’s also about social impact.
Balance your social values with your financial goals
Your investing strategy doesn’t only have to be about financial returns. You can also let your ethical and social values guide your approach.
More and more companies show that profit and sustainability don’t have to be mutually exclusive. As an investor, you can gain strong returns while supporting a cause you believe in.
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