What is Socially Responsible Investing?

In today’s world, we are faced with the threat of climate change, social instability, and several other social, environmental, and governance issues. If you’ve been wondering how to align your values with your investments, you’re in luck. Socially responsible investing funds exist specifically for this purpose and over the years the number of assets, oversight, and data available has increased.

What defines a socially responsible investment (SRI)?

An SRI fund invests in companies that are considered “green”, engaged in social justice, environmental stability, clean technology, and responsible governance to name a few. The goal of an SRI fund is twofold; to invest in social impact AND financial gain. They allow investors to align their values with their investments

According to the “2016 US Sustainable, Responsible, and Impact Investing Trends” report, there are roughly $8 trillion in assets under management in SRI funds. For perspective, the entire active management market consisted of roughly $40 trillion in 2016. The SRI asset under management figure looks to grow exponentially.

In fact, assets have grown so large in SRI funds that investors are able to take an active approach to the company’s they invest in. Many SRI funds today can push management to act in more responsible ways. If not, they can take their investment elsewhere.

How do socially responsible investments work?

SRI investments have continually changed over time. In the mid-1900’s they began using “negative” screenings. Investors would simply screen for “sin” companies. These included controversial products such as tobacco, firearms, alcohol, and more recently fossil fuels. Companies that produced these products were automatically omitted from the portfolio.

Today, a common method used to develop SRI portfolios is through environmental, social, and governance (ESG) metrics. Rather than using negative screens to filter specific companies, portfolio managers will look for specific indicators or metrics related to ESG when evaluating a company. This may include reviewing carbon emissions, diversity of management, or community participation. The goal is to identify company’s whose business models are forward-thinking, focused on the long-term, and create value through social responsibility.

Had ESG screens been applied to Exxon, Lehman Brothers, and recently Wells Fargo, would it have signaled a red flag?

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Do socially responsible investment principles sacrifice return?

A common misconception is by avoiding certain companies using SRI principles an investor sacrifices financial returns. This theory was recently debunked in a 2016 report by Morningstar. The report found that on average, SRI funds performed on par with their non-SRI counterparts. In fact, ESG screened funds with no “negative” screening, performed slightly better. Where “negative” only screened funds performed slightly worse than conventional funds.

As a whole, Millennials are a socially conscious and active generation. We believe companies who want to succeed in the long-term will HAVE to put ESG metrics at the forefront of their business models. Eventually, the pressure for those who don’t comply will become too great. Not only on their image but on their bottom line. Most recently, the CEO of Blackrock, the largest asset manager in the world, put pressure on other CEO’s of large public companies to serve a social purpose. “Society is demanding that companies, both public and private, serve a social purpose… companies must benefit all their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

We could see a future where it was no longer unusual to designate a fund as “socially responsible”, instead it’s just the norm.

How to implement SRI in your portfolio

There are several mutual funds, ETF’s, and index funds that offer diversification using ESG screens. We’d caution against picking a fund that exclusively focuses on a specific niche, such as low-carbon emissions. It’s hard to properly diversify when building a portfolio around specific niches. Rather, look for a core holding such as the iShares Select Social Index Fund (KLD). It offers broad diversification in U.S markets using ESG principles.

Lastly, as with any investment, compare fees with similar funds to determine whether you’re paying a reasonable amount. Just because a fund charges a higher expense ratio does not mean they will deliver more value and vice versa.

As SRI funds become a larger part of the investment world consider implementing it into your portfolio. After all, we want to see the world become a sustainable, accepting, giving, place, do we not? For more insight and advice on SRI investing and how it might fit into your overall portfolio, schedule a free consultation with us today.


Levi Sanchez, CFP®, CPWA®, CEPA®, BFA™
Levi Sanchez, CFP®, CPWA®, CEPA®, BFA™
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, CERTIFIED PRIVATE WEALTH ADVISOR®, CERTIFIED EXIT PLANNING ADVISOR®, BEHAVIORAL FINANCIAL ADVISOR™ designee and Founder of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. Levi’s been quoted in the New York Times, Business Insider, Forbes, and is a frequent contributor to Investopedia. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!

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