As investors become savvier about picking their investments, more and more are choosing to invest in companies that reflect their values. Whatever your issue – the environment, human rights, equity in the workplace – you can find companies that run their businesses while also being mindful of their effect on the world around them.
What is Socially Responsible Investing?
In a nutshell, Socially Responsible Investing (SRI) is aligning your beliefs and values with your investments. For example, if you don’t believe in increased expenditures for fossil fuels, you might not choose to invest in a company that makes the pipes for interstate oil pipelines. Or you may search for mutual funds that don’t invest in companies that participate in drilling or the movement of gas and oil.
In the past, companies were not forthcoming about how their decisions and practices reflected and impacted social issues. As these issues have become important to a larger percentage of investors, more companies are detailing and even promoting their beliefs through press releases or in their annual reports.
Narrow the field
Environmental, Social and Governance (ESG) standards. Companies may choose to apply this set of standards, in effect saying that they will meet or exceed these standards in the operation of their business. Investors can use ESG as a filter to narrow down their search for potential companies. While this seems a black and white decision, many financial professionals advise to take the ESG ratings with a grain of salt. The agencies that rate companies may have varied scores for the same company due to inconsistent methodologies. It’s not a bad idea to use ESG as a starting point but examine several sets of results and see if the same companies appear in all.
Brokerage screeners. Whether you’re looking for funds or individual company stocks, many brokerages provide screeners that will help you narrow down the list based on your value criteria. This combined with the ESG results above can narrow your list of investment choices.
Morningstar. Morningstar has a section on ESG practices and investment options. One caveat they give is that like the ESG agencies, fund companies create socially conscious funds using different screens set at different levels of strictness. As a result, some ETFs or mutual funds may be socially conscious in name only while others truly reflect the best-in-class companies for various ESG standards.
Note – if you do an internet search for value investing, you will probably not find a lot of companies or funds that are SRI focused. Instead, you will find funds that are built using a value approach to investing (as opposed to a growth approach). Essentially, value investors looks to find companies that are undervalued and hold them until their value is realized and reflected in an increased stock price. While value investing has fallen on hard times lately, there are still many adherents to the philosophy and stock funds that invest using that philosophy. Search for SRI or socially responsible investments instead.
How to invest
As with any other investment, it’s easy to stock your IRA or taxable investment account with SRI companies and funds. Simply find the right investment and fund your account. Naturally, you want to make sure that fees and performance are not out of line with other similar investments.
More difficult may be locating SRI investments in your company retirement plan. Some may offer a fund or two, others will not. Financial planners still recommend you fund your retirement plan to at least the amount required to capture all of the company match. If there are no funds in your retirement account that match your values, you may choose to cap your ongoing investments at the company match and invest on your own in SRI investments.
One elephant in the room. Many people believe strongly in investing in low-cost index funds and stay away from actively managed mutual funds. You can’t invest in an S&P 500 index fund and expect it to be high on SRI criteria. To invest based on your values will require more legwork on your part to identify those investments and keep fees in line.
On a continuum
Like pretty much everything in life, where you fall on SRI investing will be somewhere on a continuum. Early on in my investing life, I sold a stock after mismanagement led to one of the worst environmental disasters the US had ever seen. It was my way of speaking out against the company (and it was an expensive instance of free speech as the company stock price has since multiplied many times over).
Yet other things that get people up in arms don’t bother me. That’s really what it comes down to – what do you want to support with your hard-earned money? Discover what’s important to you and fund those companies that reflect your beliefs.
Photo by Alena Koval