If you want your investment portfolio to reflect your personal values, socially responsible investing (SRI) has a demonstrated track record of creating social change. Possibly the best-known SRI success took started in the 1970’s, when public pressure forced large institutional investors like public sector pension and university endowment funds to withdraw from South African investments. The continued economic effect of those divestments, which continued through the 1990’s, were instrumental in ending apartheid.
Today, socially conscious investors use their moral compasses to guide their portfolios in many different ways, from avoiding tobacco stocks to supporting environmentally conscious firms. In this article, we’ll break down the basics of SRI, how to find the balance between social and financial returns, and how to apply your principles to retirement plans.
What is socially responsible investing?
Generally speaking, SRI is investing with the goal of social as well as financial returns. In the corporate world, this mentality is sometimes described as triple bottom line accounting – typically, the bottom line refers solely to profit, but the triple bottom line also includes social and environmental returns. It strikes the balance between traditional investing, which is purely focused on financial gain, and simply donating money, which has social impact but zero financial benefit to the donor.
SRI runs the gamut from shareholders demanding higher standards to investing directly in changemaking organizations. Here, we’ll focus specifically on socially responsible funds, which you as an individual can support with your retirement and savings dollars, rather than individual investments or vehicles like social impact bonds. Broadly speaking, the main types of SRI funds include:
- Negative screening: These funds exclude investments based on certain criteria; common filters include environmental harm, alcohol, tobacco, gambling, or firearms.
- Positive investment: On the other side of the SRI coin, these funds actively seek out investments that further certain values. One common manifestation is environmental, social, and governance-based (ESG) investing, which focuses on preservation, promotion of human rights, and worker empowerment.
- Faith-based: Some funds follow religious tenets, like Islam’s prohibition on interest, or are selected by religious leaders, like the Ave Maria fund, whose screening process is set by the Catholic Advisory Board.
Finding the “right” socially responsible investment mostly means deciding which principles matter most to you. Whether you want to support employee-friendly workplaces or avoid tobacco, firearms, and nuclear energy, the proliferation of SRI funds makes it easier to align your portfolio with your values.
Once you’ve outlined your standards, SocialFunds.com is a good source for finding specific funds. They list a number of SRI mutual funds and their investment criteria, providing an at-a-glance look not only at the funds’ values, but also their investment philosophy – small cap and growth stocks for the aggressive investors, large cap and value stocks for the conservative ones.
Balancing social and financial returns
For the most part, SRIs will have lower returns than traditional investments – if socially responsible investing were as financially lucrative as regular investing, everyone would be doing it. If you put your money into a socially conscious fund, be prepared for it to underperform other options and/or charge higher management fees.
That said, there are certain situations where SRIs outperform typical investments – Islamic funds did well during the financial crisis, for example, while proponents of ESG argue that their investments hold long-term advantages.
If you want to evaluate the performance of SRI funds, start by finding a few funds that meet your values and investment strategy, and look up their ticker symbols on MorningStar. This lets you compare the fund’s performance against others in its category over different time periods. You can also use Google Finance to quickly compare funds against each other, or against benchmarks like the S&P 500 or Russell 2000. You probably won’t get the same returns with an SRI as you would with a top-performing traditional investment, but you can choose the best-performing fund that matches your values.
Socially responsible investing and retirement plans
If you’re simply looking to put your excess cash into an SRI fund, it’s fairly easy to make an investment through your broker. If you’re dealing with an employer-provided retirement fund, things get a little more complicated. In 2016, the US Labor Department opened the door to more socially responsible 401(k) funds, but it’s still up to the plan provider to choose the available investments.
If your 401(k) provider doesn’t have any socially responsible funds, you can advocate for an investment option that aligns with your values. (Captain401, for example, empowers employees to request investment funds for their 401(k).) SRI’s are rising in popularity; if you bring one into your company’s retirement plan, other workers might support it too.
Using your money for good
The relationship between money, career, and social benefit is always complicated. Putting your money into socially conscious investments is one more way to vote with your wallet. Whether it’s fighting apartheid or curbing the use of fossil fuels, ethical investing has had a major impact. By identifying the values that matter most, finding investment funds that match those values, and spreading the word about SRI’s, you can turn your personal savings into global change.