Socially Responsible Investing

Everybody seems to be talking about responsible investing these days. with growing concerns over climate change, pollution, and human rights violations it's no surprise that so many people are interested in putting their investments to work for the greater good as well as their own. When it comes to making the world a better place, investing isn’t the first thing that comes to mind. But socially responsible investing, or SRI, is more attainable and profitable than ever.

Socially responsible investing (SRI) is an investing strategy that aims to generate both social change and financial returns for an investor. By practicing social responsibility, a balance between economic growth and the welfare of society and the environment is created. It's a win-win for both investors and the world around them. Since everyone has different values, how investors define SRI will vary from person to person. SRI includes any issue that may or may not have a short-term impact but could have a significant long-term negative or positive impact. In investing the amount of interest you want should depend on whether you want to eat well or sleep well. Socially responsible investing is one way to make corporations act as a responsible, ethical part of society

SRI considers environmental, social, and corporate governance, known as ESG criteria. This criterion helps investors decide which companies or funds to invest in. This includes companies that respect the environment, treat their employees and suppliers fairly, and promote ethical policies. Investors looking to make such investments focus on the three key aspects – ESG to assess the sustainability or social impact of an investment (ESG investing). This approach focuses on the company's management practices and whether they tend towards sustainability and community improvement. There is evidence that a focus on this approach can improve returns, whereas there is no evidence for investing success from investing purely on social values alone.

For those with shares in publicly traded companies, the second strategy is filing shareholder resolutions and practicing other forms of shareholder engagement. Sustainable investing strategies encourage responsible business practices and allocate capital for social and environmental benefits across the economy.

SRI works the same way as any other style of investing. But SRI adds company ethics and social responsibility into the equation, instead of simply putting your money into securities for growth. SRI tends to follow political and social trends. Socially responsible investing has become a more politically polarizing topic due to the fact that the popular vessel by which those invest in socially responsible ways revolves around Climate Change, a cause that is viewed quite separately by different political factions. For example, in the 1960s, investors were mainly concerned with contributing to causes such as women's rights, civil rights, and the anti-war movement. Martin Luther King Jr. played a large role in raising awareness for the civil rights movement by targeting companies that opposed the cause as profitable in RSI companies and they’re less volatile irresponsible.

SRI is profitable in RSI companies and they’re less volatile. As the stock market fluctuates, the more volatile the company, the higher its highs the lower its lows. If they’re less volatile they’re more or less steady as they go.

SRI includes eschewing investments in sin stocks in favor of seeking out companies engaged in social justice, environmental sustainability, and alternative energy/clean technology efforts.

Socially responsible investments can include companies making a positive sustainable or social impact, such as a solar energy company, and exclude those making a negative impact. It's a dual-edge thing, for example, there are companies that produce solar panels whereas Apple doesn’t produce solar panels but they run off solar energy.

A sin stock refers to a publicly traded company that is either involved in or associated with an activity that is considered to be unethical or immoral because they are perceived as making money from exploiting human weaknesses and frailties (tobacco, gambling, sex industries, weapons, alcohol)

SRI mutual funds can not only match traditional mutual funds in performance, but they can sometimes perform better. There is also evidence that SRI funds may be less volatile than traditional funds.

In the past, there have been doubts about SRI, with opponents arguing that narrowing the field of investment options also leads to a narrowing of investment returns. Now, there is a growing pool of evidence that shows the opposite: SRI isn’t just good for your heart, it’s good for your portfolio, too.

To create your portfolio, start by identifying the level of risk you’re willing to take on. Consider your income and any current investments you have, including corporate-sponsored retirement plans. Then, define what “socially responsible,” “sustainable” and “impact” mean to you. Do you want to invest according to green energy or more in female-led companies? Think about your moral, ethical, religious, and social values. If you’re passionate about the environment, your portfolio will likely have investments in green energy sources such as wind and solar companies. If you care about supporting the advancement of women, people of color, and other marginalized groups, you may have some mutual funds that invest in women-run companies or hold stock in Black-owned businesses. And since socially responsible investing is as much about the investments you don’t choose as the ones you do, you may choose to divest from a company if you learn that it mistreats LGBTQ employees.

You’ll also have to evaluate individual companies and investments by looking beyond financial statements. Measure their potential to impact a specific cause or movement.

You should still seek competitive financial returns when looking for socially responsible investments. It’s important to recognize that while SRI may feel better than other money-making tactics, it still comes with risks. As with any investment, returns aren’t guaranteed. Assess the financial outlook of socially responsible investments as you would any others.

You have several options available to you if you want to invest in good causes. It can be done through socially conscious mutual funds, exchange-traded funds, and index funds. Sustainable investing spans a wide and growing range of products and asset classes, embracing not only public equity investments (stocks), but also cash, fixed income, and alternative investments, such as private equity, venture capital, and real estate.

Several mutual funds and ETFs adhere to the ESG criteria. If an investor is looking to invest in either of the two funds, visit the SIF website, which outlines over 100 socially responsible mutual funds. Also, they can also look at different socially responsible ETFs here.

There are funds that track companies that meet a standard or a certain set of criteria they have been consistently beating the s&p 500 and the broader market and they’re not just tech companies. They’re just some companies across various sectors that are smarter with the decisions they make (eg going solar).

Vanguard VFTSX fund is screened for certain ESG criteria and excludes stocks of certain companies in industries such as fossil fuels, nuclear power, etc. It is very similar to total stock market funds but the companies have to meet SRI criteria.

VFTSX has an expense ratio of 0.18% and is an open market ETF. VFTSX had a return of 16.10% compared to 15.27% from the S&P 500 over the last 10 years. This fund is similar to Vanguard’s Total Stock Market fund but the included stocks must meet Vanguard’s SRI criteria. If you invested in Vanguard’s Social Index Fund, you would have both increased your gains by 0.82% over the last ten years as compared to the stock market

JUST Capital, co-founded by Paul Tudor Jones, measures and ranks companies on SRI issues so Americans can make informed investment decisions. The company recently published a study in favor of ESG investing that found: top quintile of the companies in the JUST portfolio have 18-20% less volatility (6% lower beta) so these top companies in the JUST index are not swinging all over the place, 5% shallower drawdowns (when they dip they’re 5% less dippy) There are a lot of inexpensive ones too. For example, the Fidelity U.S. Sustainability Index Fund (FITLX) has an expense ratio of 0.11% and an above-average portfolio sustainability score of 50.

If an investor wants to try their hand at SRI, community investing is one of the best approaches. It entails putting money in projects that boost local communities economically. For example, projects that utilize readily available resources from the community and create opportunities for the disadvantaged.

It isn’t always easy to determine which investments are strictly socially responsible. For instance, a company could practice ethical manufacturing processes, only to dispose of waste in an irresponsible way. Some companies boast that they support female empowerment, but don’t have any women on their board. It’s important to do your homework to be sure you’re investing in actually socially responsible institutions.

• Companies that run on/ exploit fossil fuels. Many companies still burn fossil fuels just to be able to operate.

• Industries creating negative environmental impact; big polluters (coal mining; Nestle produces a lot of plastic waste and its owner is trying to buy up all the water in the world because he thinks it gonna be the next currency)

• Companies involved in huge PR scandals ( Visa and Mastercard are wrapped up in a bunch of lawsuits for unfair swipe fees; McDonald's labor strike)

• Corporate Governances such as McDonald's.Corporate Governances such as McDonald's. McDonald's worst when it comes to corporate governance they are profit-oriented, pay their employees close to nothing, and do not support maternity and paternity leave whereas there are a lot of other fast-food companies that don’t do that and are also profitable

• Companies that treat their staff poorly (McDonald's)

• Companies that capitalize off the title “sustainable” use it as a marketing ploy ( Bob’s Shoes by Sketchers)

If you invest in such companies it's the strongest way to vote with your money

Pros of SRI:

• You’re putting your money where your mouth is and investing according to your values.

• It helps support ethical companies.

• You’re investing in a cleaner, brighter future for yourself and the planet.

Cons of SRI:

• It limits your investment options.

• Not all companies are SRI/ESG compliant – you must perform your due diligence.

• SRI definition is subjective – it depends on your worldview.

- Lathika Krishna