Whenever you buy a share of a stock, you're providing capital that a company will use to grow its business. But what if you don't agree with the way that company treats its employees, its customers, or the environment? Are you ok with investing in a company that's behaving in a way that you deem irresponsible or unethical?
For many investors, the answer is no. While past generations of investors may have been more concerned with a company's potential return than its environmental and social impact, times are changing. Today, an increasing number of investors want to know that their money is really making a difference through socially responsible investing.
But how do you invest in companies that are good citizens and align with your values? And how is socially responsible investing different from traditional investing? In this article, we’ll discuss what socially responsible investing is and how you can get started with it.
What Is Socially Responsible Investing?
Socially responsible investing (SRI), also called “green” or “ethical” investing, is investing in companies that aren’t damaging the environment or are generally beneficial to society. This excludes companies that engage in the production of alcohol, tobacco, gambling, and weapons, just to name a few.
Think of a socially responsible company as a good neighbor. A good neighbor doesn’t play loud music, destroy other people’s property, or have a messy yard. SRI companies play a similar role. They don’t pollute the environment, aren’t using suppliers who are bad actors and aren’t doing things that upset the surrounding community.
Additionally, the social aspect looks at how well the company treats its employees and customers. Some people interpret SRI to mean:
- S - Sustainable
- R - Responsible
- I - Impact
Sustainable means a company is making efficient use of its resources and using renewable sources of energy. Responsible is similar to the SRI social component. Impact looks at the specific impact a company is having in the grand scheme of things.
SRI Vs. ESG
SRI doesn’t compete with ESG, but is instead a sub-component of it. SRI is broad and there are many companies that meet its criteria. ESG allows you to focus on specific areas of SRI. "ESG" stands for:
- E - Environmental
- S - Social
- G - Governance
There aren’t strict definitions for each ESG component. Of course, the more strict your criteria for meeting ESG, the fewer companies there will be for you to invest in. You may also want to consider companies that might not currently meet ESG standards but are working towards them. Those companies may still be viable investments, assuming they remain on the ESG path.
What Are Environmentally Responsible Companies?
If you want to invest in SRI companies that are friendly to the environment, you are focusing on the “E” part of ESG. This means analyzing how well companies are using their resources, are they using renewable sources of energy, are they polluting the environment, and are they using water efficiently.
What Are Socially Responsible Companies?
We covered the social aspect earlier. But to reiterate some of its important points, social companies are those that are not disrupting their local communities and are providing an overall benefit to those communities. This includes a benefit to the company’s employees as well as its customers.
What Is A Company With Good Governance?
Good governance means a company that allows outside shareholder voting. These companies will also typically have a diversified board of directors. And its management team will have a strong representation of women and minorities.
Socially Responsible Investing And Stock Performance
While socially responsible investing is certainly a noble endeavor, it doesn’t necessarily mean you'll outperform other investors. SRI companies have to stand up to the same analytic scrutiny of any other publicly-traded company. If an SRI company meets ESG standards but is not generating a profit, there’s a good chance its stock will decline.
As an investor, you have to use the same analysis of stock price to value as with any company. You might find an SRI company that exactly aligns with your values. But after analyzing its financials, you may determine that the stock price is way overvalued and the future of the company doesn’t look so bright. Investing in such a company, whether SRI or not, probably is not a good financial choice.
Socially responsible investing necessarily narrows the field of potential investments. Of the group of SRI companies, the field narrows even further when factoring in stocks that present good value in the stock market. Keep in mind that socially responsible investing is generally a long-term investment strategy. Meaning, it can take years for an SRI stock to experience a material appreciation.
How To Get Started With Socially Responsible Investing
Now that you have a solid understanding of what socially responsible investing is, how do you get started? Just like any stock or sector, you can invest directly in a company through its stock or choose a fund.
You’ll need to do most of the analysis by yourself when investing directly in SRI stocks. Probably the best way to find these stocks is to Google the criteria you're looking for with “SRI” in the search term. There are a lot of websites that follow certain SRI stocks.
Funds make socially responsible investing easy. There are now more than 350 ESG funds and ETFs to choose from. And many of the top stock broker's including Vanguard and Fidelity as well as robo-advisors like Betterment offer socially responsible investing funds or portfolios to their clients.
One way to screen these funds is through Natural Investments’ screener. Unfortunately, their screener doesn’t list each fund’s ticker. You’ll need to copy the fund name and drop it into Google to get its ticker.
One of the benchmark funds that's used to track SRI is the iShares MSCI KLD 400 Social ETF (DSI).
Socially responsible investing allows you to align your values with investments. It puts the focus on companies that are doing good in the world and benefiting society. Through SRI, you can channel your investments into companies that meet your specific ESG criteria.
However, you'll still want to make sure that you're picking companies that have strong financial fundamentals that will facilitate growth. And if you choose an SRI or ESG fund, you'll want to compare each broker's offering to find funds that are well-diversified and have low expense ratios. Here the best stock brokers to start your search for SRI stocks or funds.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.