Sustainable living is more than just a buzzword these days; it has impacted our lives from the products we consume to the food we eat, helping us find balance in our lives, both physically and mentally.
So why not apply this concept to the way we invest our money as well? Enter—socially responsible investing.
Every dollar we spend gives us the ability to make a change in the world and as investors, we are at the forefront of creating a lasting impact. This can be done through Socially Responsible Investing (SRI) which gives us the ability to grow our money while investing in causes we care about.
What is Socially Responsible Investing?
Socially Responsible Investing is when investors consider environmental, social and governance (ESG) factors when choosing where to put their money. This means choosing businesses that are ethically sound and align with the core values of the investor. SRI also means avoiding industries that have a negative impact on the environment, such as alcohol, tobacco, fast food or fossil fuel production.
The most important ESG factors vary by investor. Some may care most about the size of a company's carbon footprint while others might prioritize fair treatment of employees and ethical practices in the workplace. SRI has become incredibly popular in recent years and The Bank of America estimates that there will be a $20 million flow in this type of investing over the next two decades.
Different ways to invest in SRIs
Socially responsible investing is entirely dependent on what the investor wants to support through his/her investment strategy—be it climate change or workplace equality. Hence, there is no one size fits all approach to this type of investing. Here are a few ways to invest more intentionally:
Mutual funds are known to be safe bets for many investors, and they are popular among socially responsible investors as well. There are more than 200 socially responsible mutual funds on the US SIF website for investors to choose from. You can find data on the financial performance of a stock along with information on how the company in question contributes towards a greater social impact.
SRI mutual funds focus on three main areas:
1. Environmental, Social and Governance funds—or ESG for short—are funds invested in industries that have adopted ethical practices. The company's material impact is taken into consideration along with its financial performance.
2. Impact funds—While ESG funds place equal importance on both impact and financial performance of a stock, Impact funds aim to put social impact first. These funds invest in companies that create societal change but may not offer the best financial return. They're good choices for investors who prioritize their social intentions over financial gain.
3. Faith funds—These funds invest in stocks of companies whose values are based on the Christian, Catholic or Islamic faith. Companies that don't fall under this category are excluded.
Socially Responsible Investing isn't just limited to mutual funds; other investment assets are getting into the SRI game as well. Alternative investment options for ethical investors include property funds and hedge funds which are said to be a $588 billion industry today. Investors who opt for this type of security have over 780 alternative investment funds to choose from.
Advantages of SRI funds
People who take the socially responsible investment approach usually tend to go all in. This means that their portfolios only include stocks of companies that are socially and ethically responsible. Here are the benefits of adopting such a strategy:
1. Stick to your values
All our actions and reactions are based on a core set of values that we follow. Socially responsible investing lets us apply this principle to our investment strategy as well. Investing intentionally through SRIs allows you to do more than just discuss social issues; you have the ability to use your money to take action for what you believe in.
2. Invest and let go
Most financial assets we invest in require micromanagement—either by us or a financial advisor. SRI funds, however, are designed to be low risk, allowing you (the investor) to adopt a hands-off approach. You can use your time to focus on riskier assets in your portfolio.
Disadvantages of SRI funds
While SRI funds may seem like a great addition to your portfolio, they do have drawbacks as well. These include:
1. Financial performance takes a backseat
Socially responsible investing allows you to invest in causes that you care about, but very often a strong focus on a company's ethical practices means that financial performance can take a backseat. Studies done on SRIs at different time periods showed that they underperformed in comparison to other stocks. Hence, when picking SRI stocks, it is important that you don't deviate from your financial goals.
2. A marketing gimmick
Although climate change and the carbon footprint are growing concerns, it is also important to remember that we live in a society where profits trump social ethics. Companies that claim to be ethical or socially responsible may be using corporate partnerships to improve their position in the market. In many cases, the illusion of social responsibility is simply a marketing gimmick to earn greater profits. The sad reality is that businesses who promote eco-friendly practices may be the perpetrators of an environmental scandal. A great example of this is when Volkswagen deliberately claimed they would design a system to reduce carbon emissions in order to gain an edge over their competitors; meanwhile, the company's production plant was actually poisoning the planet.
Is SRI the right fit for you?
Millennials and Gen Z are at the forefront of using socially responsible investing to create a lasting impact with their finances. This in no way means that SRIs are a fad that will eventually pass—in fact, they are here to stay. Between 2016 and 2018, the number of investments in SRIs grew by 38 percent. In the world of investing where making money has become the main goal, socially responsible investing allows you to earn an income while promoting change.
At the same time, this investment strategy may not be for everyone. In certain situations, investors should be willing to forgo extra income in favor of supporting a social cause. This trade-off is something that needs to be considered before investing with this approach. However, if you put in the time and effort, it is possible to find stocks that meet both your social and financial goals. Striking that perfect balance can help you feel secure, knowing that your finances are put towards a worthy cause!