Socially Responsible Investing: Using Your Money to Make a Change
Investing money can help you build wealth and have a stable financial future. However, the effect of your investments on the environment and society is often overlooked in the traditional process of investing, despite its importance to wealth creation. This is where "socially responsible investing" comes into play.
The term "socially responsible investing" (SRI) refers to a specific type of investing that prioritizes both financial gains with positive social and environmental effects. When you put your money where your values lie, it means supporting businesses that share your commitment to long-term viability, ethics in commerce, and social responsibility. For example, a socially responsible investment (SRI) fund may not invest in a company if it produces potentially harmful goods (such as tobacco, opiates, or weapons) or has a poor track record in environmental protection.
As another option, a socially responsible investment (SRI) fund could put its money into businesses that are trying to solve societal or environmental issues by, for example, expanding public access to clean water or developing renewable energy sources. The term "socially responsible investing" (SRI) can mean different things to different people. Still, the end goal is always the same: using financial capital to help make a just and fair society.
How does socially responsible investing work?
Investors who prioritize SRI consider not only performance, costs, and similar factors when making investment decisions but also whether a company's revenue sources and business practices are consistent with its values and beliefs. It's important to note that the definitions of SRI vary from investor to investor since we all have different priorities and ideals.
The likes of wind and solar power may find themselves in your portfolio if you have a strong environmental ethic. You may have some mutual funds that invest in women-run companies or hold stock in black-owned businesses if you're interested in promoting the economic and political empowerment of women, people of color, and other marginalized groups. It's possible that if you learn that a company mistreats its LGBTQ employees, you will decide to divest from that company as part of your socially responsible investment strategy.
Some SRI funds may be more in line with your beliefs than others, and the types of businesses included in an SRI fund could surprise you. Vanguard's VFTSX fund, for instance, employs an ESG screen that prevents the fund from investing in specific industries like fossil fuels and nuclear power. While many socially responsible investors (SRI) would like to invest in the fund, including Amazon and Facebook raises questions about the fund's social responsibility.
There was a time when socially responsible investment (SRI) funds had higher fees than their mainstream counterparts. However, 13 of the more than 40 diversified ETFs that followed ESG criteria in 2019 charged expense ratios between 0.09% and 0.2% per year.
Of course, there are SRI funds that are more lavish in their expense ratios, but they are also more modest in their fees. The Fidelity U.S. Sustainability Index Fund (FITLX), for instance, has a relatively low expense ratio (0.11%) and a relatively high sustainability score (50) for its holdings. While Fidelity's sustainable fund has a lower expense ratio than the industry average, passive funds as a whole had a higher average expense ratio of 0.13 percent at year's end, per data compiled by Morningstar.
What is the difference between SRI, ESG, and impact investing?
Today, it's not enough to focus solely on financial gain when investing. Many investors now seek out businesses that put social and environmental concerns on an equal footing with profitability and growth.
Clients and professionals often confuse environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing, thinking these terms all refer to the same strategy. However, there are subtle distinctions in meaning between these terms.
Environmental, social, and governance (ESG) criteria assess businesses and their investment prospects. The ESG evaluation adds to a traditional financial analysis by determining an organization's ESG risks and opportunities. This involves evaluating how much money a company stands to lose or gain by not acting on ESG risks or opportunities. Although social and environmental good is a secondary consideration in ESG investing, financial gain is still the primary goal.
David Reid, Sales Director, VEM-Tooling Co. Ltd., explains, "Because these funds invest in firms that strive to maintain a moral standard, it supports and aids these enterprises. In the case of environmentally conscious businesses, there are the added benefits of becoming much more prominent and popular in the future as the effects of climate change become more evident."
Unlike ESG, which considers the company's general ethical stance, socially responsible investing may exclude or include investments based on a single ethical factor. For instance, an investor might avoid any mutual or exchange-traded fund (ETF) that owns shares of firearms manufacturers. On the other hand, a shareholder may want to put a certain amount of their portfolio into companies that give away a big part of their profits to charitable causes.
Most investors may also stay away from companies that associate with:
- Drugs, alcohol, and tobacco use all contribute to social problems.
- Weapon manufacturers
- Labor and human rights violations
- Harm the environment
Investments in impact or thematic investing are only made if they are expected to impact society positively. Impact investing's end goal is to aid a company or group in accomplishing a socially or environmentally positive mission. A good example of an impact investment would be to provide funding to a nonprofit researching clean energy. These investments are usually called impact investing funds.
Socially Responsible Investment strategy to make a just and fair society
"Socially responsible investing" (SRI) is an umbrella term for investments that are good for society. Specifically, environmental, social, and corporate governance factors are what investors look at when making these kinds of investments. Investors consider the three criteria when evaluating an investment's long-term viability and social impact.
Socially responsible investors now have several ways to ensure that their businesses also do good for society.
As the name suggests, the method involves analyzing a company's practices, goods, and/or services before investing. Potential investors will not put their money into a company if they learn it makes harmful products (like cigarettes) or participates in unethical practices.
"This can involve avoiding companies that are involved in activities that are deemed harmful to people or the planet, such as those that produce tobacco, weapons, or fossil fuels, or those that have a poor track record on environmental or labor practices," says Johannes Larsson, Founder, and CEO, JohannesLarsson.com
In this scenario, a person decides to put their money into businesses whose policies align with theirs. Let's say, for example, that a person cares a lot about the environment. Then, their portfolio will likely include investments in renewable power.
This may imply that they will only work with environmentally conscious businesses. Some examples of environmentally friendly behaviors are:
- Organizing a company-wide recycling initiative
- Water conservation
- Buying energy-efficient equipment
- Having eco-friendly rules at work, like asking people to turn off the lights in rooms that are not being used.
One of the best ways for newbie investors to get their feet wet in SRI is through investing in their local community. Community investing entails putting money into projects that improve the local community economically. For instance, projects that use readily available community resources to provide opportunities for the underprivileged.
Why should you invest sustainably?
One of the most significant benefits of investing in socially responsible companies is ensuring your investments match your values. You can choose investments that help causes important to you, such as those that protect the environment, uphold human rights, or care for animals. You can choose to finance businesses that promote sustainable practices like renewable power, water conservation, and reduction of waste or that are committed to fair labor standards and employee safety, for instance.
You can feel good about your investment decisions and know that your money is being used for a good cause if you put it toward important causes. You can invest in businesses and nonprofits dedicated to a more peaceful and prosperous future as an additional means of making a difference.
What are the benefits of investing sustainably?
When you think of socially responsible investing, you think of how you are supporting your surroundings, values, and ethics. While some investors don't consider these factors when investing, there are a few benefits to socially responsible investing.
Better risk management
People often say that one of the essential benefits of socially responsible investments is that they make it easier to handle risks. SRI investors can gain a complete picture of a company's risk tolerance by considering the company's policies and procedures in the areas of environmental, social, and governance, as well as their past performance in ethical sectors. As a result, investors will have a better basis on which to make future decisions.
If the world moves to renewable energy sources, a business with strong ESG practices may be better able to handle the change. This means that taking ESG into account can help investors figure out how much risk they are taking and how to handle it.
Has a long-term impact
Most people, when investing, usually expect immediate gains. However, the long-term effects are sometimes also taken into account while investing. When someone invests socially responsibly, they consider factors like environmental sustainability and social justice. Other than making financial gains, these investors hope to make a change in the world. Therefore, these investments through socially responsible investing have a long-term impact, both financially and non-financially, that benefits the investor and the entire world.
It gives a competitive edge
Some companies that consider socially responsible investing a hindrance do not believe it can also give their company a competitive edge. In today's vastly interconnected and globalized world, consumers give increased consideration to issues of ethics and sustainability. Therefore, consumers are more likely to support brands that they see as socially responsible.
In other words, investors are more likely to put money into businesses that are seen as social responsibility pioneers. As a result, investors are more likely to put money into companies that are seen as social responsibility pioneers.
Promotes corporate social responsibility
With the help of SRI, businesses can be pushed toward more environmentally and socially responsible practices. From a public relations point of view, socially responsible companies look better to customers and investors, boosting their bottom lines.
Companies with a solid commitment to social responsibility can set themselves apart from rivals by building a loyal customer base and a positive reputation in the marketplace.
Reduces negative impacts
Stocks and other securities linked to harmful industries like tobacco, alcohol production, nuclear power, gambling, or firearms production are avoided by socially responsible investors. In this way, SRI can assist in reducing the blow of more conventional forms of investing. One way an SRI investor can simultaneously help the environment and the economy is to put their money into renewable energy rather than fossil fuels.
What are some disadvantages of socially responsible investing?
Although SRIs present a compelling opportunity to profit while backing companies working to improve the world, they have their share of drawbacks.
Lack of portfolio diversification is a potential pitfall of socially responsible investing (SRI). Sustainable funds may be more volatile than traditional funds due to their specific investment focus on a single area, such as renewable power or green companies.
However, investors can reduce this risk by spreading it across several investments. Traditional stocks and bonds, for instance, could be added to an SRI portfolio to help cushion the blow of more risky investments.
Further, investors should rebalance their portfolios regularly to keep their investments in line with their objectives and comfort levels.
Investors can reduce the risks of SRI investing by learning about the strategy's issues and using diversification.
Limited investment options
SRI can limit your investment choices because it may exclude certain industries or companies that don't meet the requirements for social responsibility. This can make portfolio diversification difficult for investors.
Most SRI funds have greater expense ratios than regular funds, which can reduce returns. There are many actively managed SRI funds, which means higher fees. However, SRI funds are not always as cost-effective as mainstream funds due to their status as specialized products.
Because of its smaller asset base, an SRI fund that prioritizes ethical investments in green energy, for instance, may incur higher expenses than a conventional bond fund. Investors should always consider the costs of investing, but they may want to pay extra attention to transaction fees when considering an SRI fund.
When done correctly, SRI allows investors to "put their money where their values are." Investors can further positive social and environmental change by putting their money where their values lie. You make a difference by making a positive contribution to help mitigate real-world consequences, no matter how little your involvement is.
Although there are many benefits to socially responsible investing, there are also some dangers to consider. Before putting their money into a socially responsible investment fund, investors should weigh the benefits against the risks. Successful socially responsible investing is a powerful tool for making a difference and fostering positive social change. As a socially responsible investor, you should get proper investment advice from financial experts who can guide you in the right direction.