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how to invest socially responsible

How to Invest Socially Responsible

It’s tempting to think about investments as if they exist in a vacuum. All you have to do is invest your money, wait for a certain period of time, and then see your assets grow. Most people prefer not to think about where that money goes, or how it increases.

However, what you choose to invest in can be very important. There is no better way to support a worthwhile cause than to donate money to it, and vice versa for corporations with whom you disagree. Nothing speaks louder than voting with your wallet in a world where money talks. Choosing where to invest your hard-earned money can significantly affect business decisions.

If investing towards the greater good appeals to you, you’ll be pleased to learn how simple it actually is. You can start making a difference right away while still reaping the benefits of a well-diversified portfolio. Here are some tips on how to invest socially responsible:

Learn About Sustainable Investing

For many of us, making a difference in the world means more than just liking messages on social media or handing out donations to charitable causes at the end of the year. It’s about taking action, steering economic and social decisions, and leaving behind a lasting impression. “Impact investing” is one of the better ways to accomplish this.

There are several different types of impact investing: Investors can purchase individual stocks in companies they wish to support, invest in startups that pursue a worthwhile cause, or contribute their money in a way that provides both social and financial benefits.

According to the Journal of Financial Planning’s 2021 Trends in Investing Survey, 39% of financial advisor clients are already actively asking about recommendations for socially responsible investments. Even larger investment companies have begun to follow this trend, and distribute at least some of their funds into socially responsible investments.

Choose Funds That Invest in ESG and SRI

Many people still belief that you have to choose between supporting environmentally conscious businesses and concentrating on your investment returns. Nowadays, consumers who wish to invest sustainably while diversifying their portfolio have a large number of funds available to them. Environmental, Social, and Governance (ESG) funds and Socially Responsible Investing (SRI) funds are the two main categories.

Though each fund has its own set of criteria, both ESGs and SRIs usually exclude companies that manufacture weapons, cigarette products, fossil fuels, adult entertainment, and other similar items. Most large brokerage firms, including Vanguard, Charles Schwab, and Fidelity, offer ESG and/or SRI funds.

Choosing an ESG or SRI fund is very similar to selecting any other mutual fund. Look for funds with low fees and compare their returns to those of the S&P 500. Since many ESG and SRI funds are actively managed they tend to have slightly higher expense ratios than passively managed index funds. However, when comparing them to other actively managed funds they tend to charge similar fees.

Once you decide on investing in ESG or SRI funds, make sure your decisions are consistent with your other investments. For example, if the Fidelity Advisor Sustainable International Equity Fund accounts for 10% of your IRA, consider how much of your IRA is invested in other international stock funds. Don’t lose sight of fundamental investment ideas, such as diversifying your portfolio, both in terms of regions and business sectors.

Find a Robo-Advisor That Provides SRIs

Robo-advisors can help you choose an ESG or SRI fund that fits your needs and will also provide you with further advice, should you require it. They can design a portfolio that balances your financial and moral preferences. SRI investing is available through Betterment and Wealthsimple, both of which have no minimum investment limit. Apps for micro-investing such as Stash also makes it simple to invest in SRIs that align with your principles.

For people interested in a more bespoke approach to sustainable investing, robo-advisor Swell offers one-of-a-kind SRI portfolios that are made up of individual stocks. Their funds are often smaller than those of other ESGs or SRIs, sometimes consisting of less than 50 companies. Because these funds are so specific, investors are able to pick and choose from specific issues that are important to them.

If you are looking for a more personalized touch, you should consider working with a financial advisor, who has experience with investing in SRIs and ESGs. The CFP Board maintains an extensive list of socially responsible planners that are focused on this form of investment. They can assess your current portfolio and recommend which funds are best for you.

Accept the Limitations

Being a socially responsible investor is a difficult endeavor, since the term itself depends on your individual principles. Even if a fund claims to be socially responsible, it may still invest in companies that you as an investor would consider unethical.

It may be hard to discover an ESG or SRI with totally perfect holdings. Many of these funds contain hundreds of firms, so going through each one and determining if it satisfies your particular principles can take some time.

Some experts believe that choosing a variety of low-cost ESG and SRI funds that meet your long-term goals is the best solution. Don’t be concerned if any of the included stocks don’t completely align with your preferences. Instead, try to commit to giving more money and time to projects you believe in. Approach your legislators about topics that are important to you. This will have a far bigger impact than merely divesting small amounts of money from a few huge corporations.

Another factor worth considering is the way corporate culture impacts investment returns. With a few exceptions, the most successful organizations that also provide the biggest returns to their investors are less likely to adhere to strict moral guidelines or apply a socially-responsible business strategy. Working for the greater good frequently demands sacrifice, and the same is true for investing.

However, don’t let that discourage you. Investing according to your ethical principles will allow you to profit from environmental, social, and cultural progress. Solar energy, for example, is a successful and sustainable sector. As more people and businesses transition to solar and other sustainable energy sources, those industries will continue to provide remarkable returns to their investors. And isn’t increasing your wealth while also feeling good about the impact of your investment choices the best financial combination you could hope for?

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