- Socially responsible investing (SRI) involves investing based on both a company’s expected financial performance and its contributions to society more broadly.
- Investopedia rated M1 as the #1 outlet for SRI.
- SRI can be adapted to any value system, and guidelines exist for choosing socially responsible investments based on a variety of issues and principles.
- One major potential downside of SRI is that it may yield lower returns than investments that focus only on financial performance.
Every year on April 22, people from all around the planet celebrate Earth Day. In previous years, people have gathered to march, plant trees, clean up beaches, and more, to help our planet and our environment. This year is a little different, and as many of us stay home, you may be wondering how you can get involved right from your couch.
Well, here’s a possibility: socially responsible investing, also called SRI.
You may already have considered this conundrum: you want to invest in the stock market to grow your wealth, but you don’t want your money to support or enable evil corporations (whatever your definition of “evil” might be).
With socially responsible investing, the goal is to invest with the intention of building wealth in a way that takes into account the impact that companies have on the world and its people. And the beauty of socially responsible investing is that it’s not a one-size-fits-all proposition; whatever your beliefs or values, there are ways to invest so that you uphold them while building wealth.
Here, we’ll offer an overview of various types of socially responsible investments, benefits and drawbacks of SRI, and how to find acceptable investment vehicles for your worldview, whatever it is.
Types of socially responsible investing: SRI, ESG, impact investing, faith investing
There are several terms associated with socially responsible investing practices, and each refers to a slightly different facet of SRI. Here’s a breakdown:
- SRI: Consider this the umbrella term for the category. Socially responsible investing refers to a strategy that factors in both the financial returns of an investment and its effect on the larger world. Usually, that effect is measured by three metrics: environmental impact, social impact, and corporate governance. This brings us to the next term.
- ESG: ESG is shorthand for the three criteria mentioned above: environmental impact, social impact, and corporate governance. ESG is sometimes used as a synonym for SRI; it’s also used more generally as shorthand in various investing contexts to describe these three elements of a business.
- Impact investing: Impact investing is a distinct subset of SRI in which the primary goal is positive social impact. Financial returns are only of secondary concern.
- Faith investing: This subset of socially responsible investing focuses on building portfolios based on the values of specific religious traditions. So while Catholics, Hindus, Muslims, and Methodists may have different individual values, they can all use faith investing principles to build portfolios that align with those values.
Of note: “value investing” is a different concept entirely. It refers to the practice of investing in companies that you think the market is undervaluing and does not fall under the umbrella of socially responsible investing.
The pros & cons of socially responsible investing
Because no two investors are exactly alike, it’s impossible to make a blanket statement about when and whether socially responsible investing makes sense. The best investment vehicles for any one person will depend on that person’s larger plans, strategies, and risk tolerance.
However, if you decide that you are interested in pursuing a socially responsible investment portfolio, it can offer many benefits:
- The ability to build wealth without compromising your morals
- The ability to invest in companies whose work you believe is improving the world
- The ability to contribute to causes you care about when you’re unable to sacrifice time to volunteer or money in the form of donations
And because there are now more options for investors who want to use SRI in their portfolio, including mutual funds, ETFs, and investment advisory services, you can enjoy all these benefits as actively or passively as you would any other investment strategy.
Like any investing strategy, of course, socially responsible investing also has potential drawbacks, including these:
- Profits are not always the top concern. This means you may earn less than you would if you invested without considering social impact. Then again, no investment returns are ever guaranteed.
- You’ll have to watch out for “greenwashing.” As SRI has grown in popularity, more companies have adopted the practice of “greenwashing,” which involves making themselves appear socially responsible (via certain marketing, donations, etc.) while still engaging in socially or environmentally harmful practices.
- Corporate practices may change. Companies are not static. Just because you agree with a company’s practices one year doesn’t mean you will the next. Because of this, you’ll have to stay up to date on the practices of companies in your portfolio (or choose funds that do this work for you).
Of course, for the engaged investor, regularly researching the companies in your portfolio shouldn’t be a new concept or an added burden. Just know that when you engage in socially responsible investing, you’re adding an objective beyond earning money to your investment portfolio, which means you’ll have to track the performance of that additional objective.
How to find socially responsible investments for your portfolio
First, the bad news: there’s no tool currently available that lets you enter the name of funds or individual stocks and receive a score on various facets of social responsibility.
The good news, though, is that there are many helpful guides that offer tips for choosing investment vehicles that align with various moral perspectives. Here are some of the most helpful we’ve found:
- For learning the basics: Check out FINRA’s guide to ESG investing to get tips on what to look for in investments like ETFs. This guide also outlines some common traps to keep in mind and avoid while building an ESG portfolio.
- For social and environmental justice: Take a look at Green America’s Guide to Socially Responsible Investing and Better Banking. Among other things, this series of articles offers tips for how to engage in shareholder activism to spur change within companies and information on the divestment movement. The USSIF also offers Investing to Curb Climate Change, which discusses not just where to put investment funds but also ways to encourage more climate-friendly practices at local businesses and in local government.
- To support women’s rights: Check out this article about “gender lens investing,” where you can learn about how some companies develop funds with women’s empowerment in mind, as well as some of the common pitfalls associated with them.
- To align with your faith: Many religions offer guidelines for investing in a way that aligns with their precepts or specific products designed to adhere to those guidelines. Examples include the Dow Jones Islamic Market Index, Socially Responsible Investing Guidelines for Catholics, and the Unitarian Universalist Association’s Socially Responsible Investment Guidelines. If you follow a faith tradition and are interested in investing according to its principles, do a little Googling; you’ll probably come across helpful guidelines.
The bottom line here is that there are amazing resources available online to guide your socially responsible investing journey, but they will require you to do some legwork. But at M1, we believe that you should be doing that legwork to research anything you invest in!
With socially responsible investing, feel better about building wealth
Building wealth and achieving financial independence are goals for many of us. Most of us also want to leave the world better than we found it and pass along something of value to our children and grandchildren, if we have them.
Socially responsible investing is one strategy that can help you do those things by both supporting and benefitting from companies and organizations whose work adds to the world in a way that aligns with your values.
If you’re interested in launching your SRI journey with M1, you can do so in two ways: by putting money in one of our SRI Expert Pies or by creating your own Pie with socially responsible stocks and ETFs that you discover through your research into SRI options.
Further reading suggestions: