Socially Responsible Investing: A Complete Guide

Everyone knows about stocks, bonds, currency exchanges and mutual funds. But socially responsible investing (SRI) is not just about financial performance. Instead, SRI has a twin set of goals. One is financial gain. And the other? Social impact, also known as doing good.

Doing good surely sounds like something you want a piece of, but may also sound like an easy way to complicate traditional investing, which is already complex enough. But once you realize it’s more of a new way of thinking than new way of investing, you’ll be sold. 

Or you’ll be buying, more accurately.

Making money doing good

You already practice social responsibility, and likely in myriad ways. You vote for elected officials whose values mirror yours and whose integrity you trust. You don’t shop at stores or dine at restaurants managed by companies known for practices of which you disapprove, be they matters social, ecological, ethical, and beyond. You follow laws that help maintain the social fabric, from stopping at red lights to respecting private property to using the crosswalk. You don’t litter. And on it goes.

But when it comes to investing, you may accidentally be helping prop up organizations whose values, integrity, and ethics are anything like yours simply because you don’t know where all of your money is invested. 

It’s entirely possible that your money, if it’s in a 401(k), an exchange traded fund (or ETF) managed by third party investment management firms, may well be tied up with just the sort of businesses and investment strategies you would never patronize directly. they may even be indirectly helping support politicians whose politics you loathe via corporate donations.

The solution isn’t to ditch investing entirely and hoard your cash in a mattress, nor do you have to sacrifice sound investment in the name of sustainable and responsible investing practices. While bringing values and ethics into play with impact investing does add a layer to the investment process, it need not hamper your financial success.

In other words, you can commit to socially responsible investing and still be focused on all the standard matters of personal finance, from a focus on growing your nest egg to figuring out how to save money when possible to making an impact on others based on where you put your money.

And you can get started just as soon as you have a better understanding of socially responsible investment practices. After all, there are registered investment companies that provide socially responsible mutual funds, community investing and sustainable investing strategies, and plenty more that will help you do good things with your money. 

What are socially responsible investments?

Some say that socially responsible investing is not activism. Furthermore, they would say that SRI is not to be confused with “activist investing,” which is a whole other thing, and one rarely associated with social responsibility at that.

However, from another perspective, socially responsible investing and activism can go hand-in-hand, and ultimately all actions are political. Putting investments in ethically, environmentally, trusted companies can indeed represent a very progressive or political act.

The popularity of socially responsible investing has grown in recent years, and while socially responsible investments trends often align with political and social mores of the day, the move toward SRI is steady and lasting – note the numbers of the VFTAX and NEXTX funds below as evidence. 

And in some cases, SRI is not even about growing one’s own wealth, but instead is an investment in a greater community. In these cases, the moves represent a strategy where the return on the investment is calculated not in dollars, but in betterment of the human condition in a given population.

And that’s pretty powerful stuff, when you think about it. Community investing institutions have great potential. 

Sustainable investing: An SRI definition

While of course it’s always best to have a plethora of information when the topic at hand is an important one – and being as we are talking about your money and about social responsibility, this here is an important one – it can be helpful to have a concise definition of a term to make sure everyone is on the same page.

So going forward, even as we broaden and deepen our understanding of socially responsible investing and get into some of the specifics of the practice, let us use this as our shorthand definition of socially responsible investing:

SRI refers to any financial investment considered socially responsible when the nature of the business or fund into which the money goes is fully understood.

Think of it like this: you know which friends you can trust with a secret (or a loan). You know which you probably can’t. And you know you’re not quite sure of others. Guess which group represents the socially responsible organization. Correct, only the first.

The types of investments to avoid when going the SRI route 

We are not going to name names here – you can do that on your own just fine, no doubt – but we are going to highlight a number of the types of companies most people interested in socially responsible investing are most interested in avoiding.

Firearms and fossil fuels

Some of these organizations are ones it’s obvious you’ll want to avoid, such as a company that makes firearms, a fossil fuels extractor, a clothing or textile brand known for exploitative labor practices, a petrochemical company, or any brand known to be affiliated with political, religious, or other types of institutions to whom you are personally opposed. (Or at least not looking to actively support.)

Other times, it can be harder to glean when a company does not fit the SRI criteria. Maybe they seem like a decent enough lot, but when you look deeper, you’ll see their supply chain is a serious cause of greenhouse gas emissions. Or that they lobby for causes that are anathema to your worldview. Or that they have a reputation for poor treatment of employees. All of these and many more are more than good enough reasons to put your money elsewhere.

Also, don’t think simply not proactively buying shares of a gun manufacturer, an oil giant, a cheap clothing provider, or a chemical company guarantees that your portfolio is squeaky clean from an ethics standpoint: if you are already invested in many single stocks and/or in funds, you may be holding shares that run against your moral code. 

You may well have some divesting to do, in other words. The good news is that you turn those shares into cash as you say goodbye to those less than “good” investments. Or even better than cash, you can parlay the money you make from selling unwanted stocks into sustainable funds

Will SRI hurt your overall portfolio?

It doesn’t have to. At all. But it will require more work, as you both have to make smart moves and righteous moves, so to speak. And you are indeed cutting a lot of potential sources of revenue out of your purview, so you’ll need to pick up some slack.

If you’re worried about what could be fairly called “investment FOMO,” FOMO of course an acronym for “fear of missing out,” the best way to allay your fears is to increase your information. Go right ahead and follow all those stocks and funds in which you have made the moral choice not to invest – chances are good that you will see their numbers rise and fall in much the same patterns as the values of the socially responsible places in which you invest. The rising (and falling) tide of the market affects all ships, if you’ll allow the metaphor, so you may as well have the moral high ground.

And if you take comfort in numbers, here’s one to note: $17.1 trillion. With a T, trillion – that’s how much money is invested in socially responsible assets in the United States alone, according to a report from The Forum for Sustainable and Responsible Investment. And that figure represents a five trillion dollar increase in SRI assets in America when compared to a report issued just a few years earlier, showing this is hardly a bubble or passing trend, but rather an ongoing and ascendent model for prudent and ethical investing. 

Understanding socially responsible investing on a personal level

As with all investment, the first thing you have to understand about SRI is why you are doing it. That may sound simple but it’s anything but, because it means understanding your personal financial goals, both short- and long term, and that alone can be a Herculean task. 

You need to account for the expenses you face now, that you will incur in the next few years (a new car or a down payment on a house, perhaps?), likely expenses in the next few decades (tuition costs for the kids or cash to start a business, maybe), and you need to think about how, where, and when you want to retire. And that’s not to mention any legacy planning.

Assess your values 

Then you need to honestly assess your own values. Do you want to support causes affiliated with religion, or to eschew them? Are you a diehard supporter of social justice? Are you in favor of a more conservative approach that maintains the status quo? Do you care deeply about the environment? Are you a supporter of unregulated, free market capitalism above all else?

There are no right or wrong answers from an objective viewpoint, there are only rights and wrongs as they pertain to your own beliefs and values. Once you have your house in order, morally and ethically speaking, then you can go out looking for companies and funds that line up.

Or better yet, you can sign up with a group of investment professionals who will manage your socially responsible investing for you.

Socially responsible investing examples

One way to practice socially responsible investing is to hand-pick stocks of companies you know to be aligned with your values. If you care deeply about the fight against deadly diseases that unfairly impact the underprivileged, you may want to invest in a company like Gilead Sciences, for example, as they are widely respected for their commitment to improving global health. 

If you care deeply about cleaner, greener energy, consider buying shares of a clean energy company like First Solar, a company with sustainability and social responsibility baked into its business model. Or you can take a longer approach and buy bonds that will help prop up a community you care about.

And on it goes. The problem for the individual investor using this approach is that to create a truly successful, dynamic socially responsible investment portfolio, you may well need to make doing so something of a full-time job. Or at least a busy part-time gig.

So instead, consider signing on with an investment advisor or manager willing to take your direction to only invest ethically. Responsible investors will factor in your values while striving to put your money where it can do well for you financially, as of course they have a vested interest in its performance as well – the better their investment decisions do for you, the better those investment dollars do for them, too.

ESG funds: What they are, what they do

Three key issues often on the minds of those interested in socially responsible investing are matters environmental, social, and of governance, often referred to as ESG investing for short. 

Those are big topics. Colossal, really – indeed they are in the minds of many the most pressing issues of our day, given the slow but severe damage climate change is having on the planet, the strife that has ripped through civil society in recent years in the wake of police violence, protests, and the push for rights and representation, and then of course the divisiveness of the present political climate.

Frankly, it can be overwhelming to plunge into matters of the environment, the civil and social discourse (or lack thereof), and the governance of our nation even without the added lens of financial matters. Which is why it’s good news that you can turn to experts who devote all of their professional time to ESG investing. 

These fiduciaries do their best to increase the value of your investments while at the same time ensuring that your money is tied to causes that you value.

ESG funds are simply specifically established to bring together myriad socially responsible organizations and financial instruments. An SRI mutual fund or an SRI exchange-traded fund will work just the same as any other fund, it has simply been vetted and created with a unique perspective. 

A few SRI fund examples include the Vanguard FTSE Social Index Fund, or VFTAX, and the Shelton Green Alpha Fund, which is known as NEXTX on the stock ticker. For reference,  the Vanguard VFTAX fund has nearly doubled in value in the past few years, while the Shelton Green Alpha Fund has more than tripled in less than half a decade.

SRI can give you power

Investing in socially responsible companies and funds is a good thing because it does good things, and because it can grow your wealth. But that’s not all SRI can do for you.

Money talks, we all know that. And when enough people put enough money in the same place or places, it can speak volumes and be loud enough that the powers that be are forced to listen, respond, and adapt. 

By investing in companies committed to producing green energy, to the manufacture of sustainable products, to ethical treatment of workers, to transparency in all aspects of their operations, to ethical corporate governance, you help bolster those companies already doing the right things, and you offer proof of concept that may help convince other organizations to amend their practices, seeing that the responsible approach is working elsewhere.

Shareholder engagement can be the best way to direct the moral compass of a company, so get engaged, both by investing as well as by voting and making your voice heard, be that via calls or comments or by spreading the word. And also don’t forget that another power play is dumping the shares of companies or funds that you think come up short in terms of social responsibility.

Final thoughts

Let’s be crystal clear here: if your only goal for investing is to make money for yourself, then socially responsible investing is probably not the right avenue for you. But if you’re the kind of person who will pay a little extra for locally sourced this, ethically produced that, or fair-trade certified the other thing, then chances are good that SRI is the right move for your portfolio and your soul. And for the world at large, too, of course, to which you and that soul of yours are connected.