What Is Socially Responsible Investing (SRI) and How to Get Started

Socially Responsible Investing (SRI) is a fairly radical strategy that has increasingly gained traction among individual investors in recent years. Sustainable investing seeks to generate long-term returns while promoting environmental, social, and corporate governance (ESG) practices. According to a 2018 report by investment research company Morningstar, there are currently 303 sustainable open-ended mutual funds and exchange-traded funds available in the US market.

This type of investing has grown exponentially since its conception in the early 1970s, when individuals began taking an active role and applying ethical criteria to their investments. The idea behind SRI is simple: it allows investors to put their money into companies and organizations demonstrating positive values, while avoiding those who don't meet the standards set out by their own definition of social responsibility.

Socially Responsible Investing (SRI) is an investing strategy that seeks to generate financial returns while making a positive sustainable social impact. It is generally referred to by names including Values-Based Investing, Sustainable Investing, Ethical Investing, Impact Investing and ESG Investing. SRI practices include the incorporation of environmental, social and governance factors into investor decision-making processes. SRI investors may choose to include companies making positive contributions to society or exclude those with negative impacts. For example, an investor may choose to invest in a solar energy company instead of a coal mining company as part of their socially responsible investments.

The abbreviation SRI is used when referring to Socially Responsible Investing which has become increasingly popular among investors who want their money to make a difference in creating social change along with providing financial returns.

Gaining insight from experts can be incredibly helpful when it comes to socially responsible investing. A small portfolio can contain elements impacting a variety of social and environmental causes, such as clean energy, electric vehicles, gender equality and the avoidance of fossil fuels. But with so many latest trends and looming effects from individual companies and resources, it's important to understand how to properly screen funds and manage a SRI portfolio.

Data sources like company notes and ESG impact data allow investors to monitor the performance of individual stocks or mutual funds based on their social impact measures. It's an incredibly easy way to build your own SRI portfolio but understanding the challenges involved in this potentially profitable pursuit requires more knowledge than just reading up-to-date information about a specific agenda.

A knowledgeable financial advisor can help shed light on the best ways to properly balance risk and reward for your bottom line while still making sure that you're pursuing social good. With their experience handling SRI portfolios, they can give you a clear understanding of the perspective specifically tailored for your investment goals. So if you're passionate about making a positive difference in the world through investing, enlisting the help of an expert is key for building a successful portfolio that will benefit both you and society as a whole.

When it comes to investment choices, more and more investors are choosing to pursue ESG investing. ESG stands for Environmental, Social, and Governance — three areas that encompass many of today’s social problems, from climate change leading to severe climate crises to gender and racial inequality, data security, and much more. These issues are far beyond the purview of investments, but ESG investing is a way for individuals to fight climate change and social injustice by using their capital.

An ESG investing strategy offers higher returns than the large cap diversified index (JULCD). The index consists mainly of large public companies with high ESG scores that have demonstrated a commitment toward employees, beneficial products, positive environmental performance, strong communities — all while outperforming the Russell 1000 Index by a slim margin. Exchange-traded fund (ETF) contained stocks from the JULCD index which was originally created by Goldman Sachs. The ETF offers strong ESG scores with decent return on investments making it an attractive option for those wishing to invest responsibly.

There is a growing body of research that shows that ESG investing helps mitigate risks associated with funds and indexes. Haverford Trust Company found that their own proprietary ESG indexes have recently outperformed broad market indexes such as the Russell 1000 by a greater percentage when compared over longer time periods — even despite poor performance in some tech-heavy sectors represented in these types of funds. This means investors can use their investment dollars to make meaningful changes while still enjoying good returns if they choose an experienced financial advisor who can help them introduce funds with ESG criteria without overly concentrating risk within a single company or sector.

For investors interested in socially responsible investing (SRI), there are many factors to consider before selecting investments. SRIs don't just look at a company's revenue sources, but also how the business practices align with their own values. Investors define SRI differently depending on what you're passionate about; some want to prioritize green energy sources while others may invest in solar companies or women-run businesses. Other investors choose to invest in black-owned businesses or other marginalized groups.

Mutual funds offer an easy option for investors looking to get involved in SRI. Before choosing a fund, check that it doesn't choose companies that mistreats LGBTQ employees or excludes stocks from fossil fuels or nuclear power. Vanguard's VFTSX fund is a great example of an SRI fund; its ESG criteria means that its funds holdings include Amazon and other top companies, but excludes any with too much exposure to risky assets or poor labor standards.

Although SRIs have come a long way since past SRI Funds, they do often come with higher fees than their traditional counterparts. According to 2019 Morningstar data, 40 diversified ETFs follow ESG criteria and 13 charge expense ratios more than double the average mutual fund expense ratio. However, investors don't need to choose expensive SRI funds — you can find fairly inexpensive options such as Fidelity's Sustainable Impact Fund FITLX which has an expense ratio below 0.50% and an above-average portfolio sustainability score when compared with non-ESG passive funds in 2019. Higher fees may be worth it if you want to support socially conscious companies, but make sure you compare costs first! To learn more about typical mutual fund expense ratios, read our article here!

Committing to a cause is an important part of socially responsible investing. Instances of investors taking a stand for their personal beliefs and values are abundant, and more people are starting to review the 17 sustainable development goals set forth by the United Nations. Companies strive to make a commitment to clean energy, gender equality, racial equality, clean food, energy affordability, housing affordability, and animal rights.

The process of making an explicit commitment to societal good begins with reviewing a company’s mission statement or the funds mandate. Investors hope that by committing their investment dollars to ESG companies they can maximize returns while still having a positive societal impact. To facilitate SRI investing there are many newer investors tend to opt for pooled investment products such as mutual funds or exchange-traded funds (ETFs) which allow them to efficiently diversify smaller sums of money.

In recent years there has been an increase in ESG-focused investment products that have an explicitly stated commitment to non-financial factors. Frequently managers of these investment products make sure not to invest in fossil fuel companies or weapons manufacturers by managing negative screening. This type of investing is also known as “ethical investing” and gives investors the ability to remove funds from their portfolio if it doesn’t align with their internal values or environmental values. Mutual funds can also be used explicitly avoid certain types of investments as well.

Socially Responsible Investing (SRI) is becoming increasingly popular, with ESG scores providing a handy metric for investors to assess the environmental, social and governance performance of individual companies. ESG research firms produce scores that represent ratings based on multiple criteria. Linda Zhang, Senior Advisor of Purview Investments, states that “Rating firms tend to use a wide range of factors including corporate policies and performance across specific areas such as management of natural resources, disclosure practices or production processes.”

Leading ESG research companies such as MSCI Capital generally follow a 100-point scale when assigning an ESG score to a company. This score is derived from how well the company performs against various ESG criteria. The weighting schemes and specific factors assessed vary from firm to firm but commonly include things such as environmental impact assessments, workplace safety reviews and even controversial weapons screenings.

The method behind ESG score calculations may be complex but understanding how they are produced can help investors make more informed decisions about their socially responsible investments. By researching well-regarded ESg research companies, investors can gain a better insight into the individual components that go into producing an overall score for each company.