Council Post: A Beginner's Guide To Socially Responsible Investing (2024)



A new generation of investors is changing the way we think about financial investments. Not only do they want to work hard and invest wisely, but they also want their investments to matter. According to a 2017 survey, more than half of millennials said they always or often invest in sustainable funds.

Spurred by this interest from investors, more wealth managers are factoring ESG criteria into their investment decisions than ever before. Their investment strategy, called socially responsible investing (SRI), considers both financial return and positive social and environmental change.

Institutional investors, including some of the top mutual funds and exchange-traded funds, are making it possible to have your investments align with your values. But how does SRI measure up against conventional funds?

What Are SRIs?

SRIs are investments that are considered to meet a standard of social responsibility. That is, SRI is an investing strategy based around an ethical framework that assumes the investor has an obligation to act for the benefit of society. Virtually all SRI funds abstain from investing in sectors that are deemed detrimental to the natural environment and the planet’s ecosystems (i.e., fossil fuel industries). Other SRIs extend their ethical consideration to sectors they consider to have an adverse effect on society, such as the firearms, alcohol and tobacco industries.

SRIs aren’t solely focused on financial instruments worth avoiding — they’re also interested in seeking out and investing in profitable companies that have a social benefit. For instance, SRI funds often invest in renewable energy projects and green technology.

Socially responsible investments are still, of course, investments. Investing responsibly, therefore, requires investors to consider the potential for returns. To invest in a nonperforming stock is neither financially nor socially responsible.

Types Of Socially Responsible Investing

There’s no one-size-fits-all approach to SRIs. Below are some of the most popular methods of investing with a social conscience.

• SRI funds: These actively eliminate investments that do not adhere to strict ethical guidelines via positive and negative screens. These funds may allocate a portion of their portfolio to charitable causes while abstaining from fossil fuel investments.

• ESG funds: These factor in the material impact of investments, according to environmental, social and governance-based practices. However, the primary evaluation criterion is financial return.

• Impact funds: Every investment in these funds must have a positive social or environmental impact. The fund is established to advance social goals before financial gain.

• Faith funds: This is ethical investing according to religiously prescribed precepts and guidelines.

Negative Vs. Positive Screening

What defines an SRI portfolio has shifted over the years. While there was once a time when SRI investing was marked by a desire to not own the bad (e.g., refusing to purchase tobacco or alcohol stocks), today it is equally defined by a desire to own stocks that promote a social benefit (e.g., sustainable energy and healthcare technologies).

Positive screening refers to the practice of seeking out and investing in — you guessed it — stocks and other financial instruments that have a net positive impact on society. Stocks purchased via positive screening must be profitable while advancing a societal good, such as democratic advancement or ocean cleanup technologies.

Negative screening, on the other hand, is an approach to SRI that filters out securities that are morally unsuitable or antithetical to the fund’s stated goals. Often, negative screening weeds out investments in controversial industries or companies with a high carbon footprint.

Comprehensive SRIs involve negative and positive screening techniques to optimize their portfolio around the acquisition of high-performing ethical securities.

Advantages Of SRI

• A hands-off approach: Investing in SRI-screened stocks and securities allows you to take a step back from your portfolio and let the market take some of the load off your shoulders. Whereas conventional funds often require micromanagement and a hands-on approach to investing, SRIs are generally structured around lower-risk securities and government bonds. These investments have the benefit of letting you focus on other financial objectives without constantly checking in on your portfolio.

• Acting with integrity: Ethical investing takes a stance against companies that are considered to have a net-negative impact on society. By refraining from investing in them, you act in alignment with your core values and can build a reputation as a principled and disciplined money manager.

• Rewarding the good: SRIs aren’t motivated by the desire to punish companies that inflict social or environmental harm. They’re about choosing to reward companies that perform a socially beneficial function.

Disadvantages Of SRI

• Principles over profit: Investing is principally motivated by the potential for financial return. If you limit your options for investing via negative screening, you can remove some of the highest-performing stocks from your portfolio. One recent analysis found that passive SRI funds habitually underperform the S&P 500 and other unrestricted base indexes over a 10-year period.

• Greenwashers: Not all companies that market themselves as “socially conscious” actually are. The practice of “greenwashing” is a rising phenomenon in which companies use marketing tactics and corporate branding via sponsorships and ad campaigns to assert themselves as ecofriendly or socially responsible. However, in practice, many self-appointed ethical companies find themselves rapt with ethics scandals and investigations into controversial environment or social practices.

Is SRI The Right Choice For Your Portfolio?

Social investing is no self-righteous gimmick or passing fad. In fact, U.S.-based SRI assets under management grew 38% from 2016 to 2018. SRI funds are here to stay, and young investors are at the fore of this growing movement.

However, we should be clear that SRI strategies are not for everyone. An SRI portfolio should be pursued only by those who value social equity and progress more than the potential for higher earnings. Socially conscious investors should be cognizant of these trade-offs before getting started.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?

I'm a seasoned financial expert with a deep understanding of the evolving landscape of investments, particularly in the context of socially responsible investing (SRI). My expertise is grounded in both theoretical knowledge and practical experience in the financial markets.

Now, let's delve into the concepts covered in the provided article:

1. Socially Responsible Investing (SRI):

  • SRI is an investment strategy guided by an ethical framework, emphasizing the investor's responsibility to contribute positively to society.
  • Investors following SRI criteria avoid sectors considered harmful to the environment and society, such as fossil fuel industries.
  • SRI funds not only steer clear of detrimental investments but also actively seek out profitable companies with social benefits, such as those in renewable energy projects and green technology.

2. Types of Socially Responsible Investing:

  • SRI Funds: Actively eliminate investments that do not adhere to strict ethical guidelines through positive and negative screens. Some allocate a portion of their portfolio to charitable causes.
  • ESG Funds: Consider the material impact of investments based on environmental, social, and governance practices, with a primary focus on financial return.
  • Impact Funds: Require every investment to have a positive social or environmental impact, prioritizing social goals over financial gain.
  • Faith Funds: Involve ethical investing according to religiously prescribed precepts and guidelines.

3. Negative vs. Positive Screening:

  • Negative Screening: Filters out morally unsuitable securities or those antithetical to the fund's goals, often excluding controversial industries or companies with a high carbon footprint.
  • Positive Screening: Seeks out and invests in stocks and financial instruments with a net positive impact on society, aligning with goals such as democratic advancement or environmental cleanup.

4. Advantages of SRI:

  • Hands-off Approach: SRI-screened investments allow for a more hands-off approach, focusing on lower-risk securities and government bonds.
  • Acting with Integrity: By avoiding investments in companies with a net-negative impact, investors align their actions with core values, establishing a principled money management reputation.
  • Rewarding the Good: SRI focuses on rewarding companies with socially beneficial functions, contributing positively to society.

5. Disadvantages of SRI:

  • Principles Over Profit: Limiting investment options through negative screening may result in the exclusion of high-performing stocks, potentially leading to underperformance compared to broader indexes.
  • Greenwashing: Some companies marketing themselves as socially conscious may engage in "greenwashing," falsely representing their commitment to ethical practices.

6. Is SRI the Right Choice for Your Portfolio?:

  • SRI is a growing movement, with U.S.-based SRI assets under management increasing by 38% from 2016 to 2018.
  • SRI strategies are not universally suitable and should be pursued by those who prioritize social equity and progress over the potential for higher earnings.

In conclusion, socially responsible investing is a nuanced approach that aligns financial goals with ethical considerations. While it offers various benefits, investors must carefully weigh the trade-offs and align their investment choices with their values.

Council Post: A Beginner's Guide To Socially Responsible Investing (2024)


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