Investing with an eye toward promoting social, political, or environmental concerns (or at least not supporting activities you feel are harmful) doesn't mean you have to forgo pursuing a return on your money. Socially responsible investing may allow you to further both your own economic interests and a greater good, in whatever way you define that term.
There are many approaches to what may also be known as mission investing, ethical investing, socially conscious investing, green investing, sustainable investing, or impact investing.
Screening potential investments
This is perhaps the best-known aspect of socially responsible investing: evaluating investments based not only on their finances but on their environmental, social, and even corporate governance practices (ESG). Screens based on specific ESG factors may eliminate from consideration companies whose products or actions are deemed contrary to the public good. Examples of companies that are frequently excluded from socially responsible funds are those involved with alcohol, tobacco, or gambling, and those that contribute to environmental pollution or that have significant interests in countries considered to have repressive governments.
Both individual and institutional shareholders have become increasingly willing to pressure corporations to adopt socially responsible practices. In some cases, having a good social record may make a company more attractive to investors who might not have previously considered it. Shareholder advocacy can involve filing shareholder resolutions on such topics as corporate governance, climate change, political contributions, environmental impact, and labor practices.
Still another approach involves directing investment capital to communities and projects that may have difficulty getting traditional financing, including nonprofit organizations. Community investing often helps not only individuals but small businesses that may operate in geographic areas that mainstream financial institutions deem too risky.
"Impact investing" aims not only to further a social good, but to do so in a way that maximizes efficient use of the resources involved, using business-world methods such as benchmarking to compare returns and gauge how effectively an investment fulfills its goals. Such unique investments may be more similar to venture capital and private equity (where the concept of impact investing originated) and may not be highly correlated with traditional assets such as stocks or bonds.
Cast a wide net or target your investments?
One of the key questions for anyone interested in socially responsible investing is whether to invest broadly or concentrate on a specific issue or area. A narrow focus could leave you overly exposed to the risks of a single industry or company, while greater diversification could weaken the impact that you might like your money to have. Even if you choose to focus on a single social issue, you may still need to decide whether to invest in a specific company or companies, or invest more broadly through a mutual fund whose objective meets your chosen criteria.
Special knowledge of a particular field can have many benefits but don't let that blind you to the business fundamentals of a particular company; you still need to keep an eye on how it stacks up as a stock. Also, if you're considering a small company stock that is closely aligned with or furthers your chosen issue, don't forget that smaller companies can be extremely volatile. You also could consider investing in larger companies that have made a significant commitment to initiatives in your chosen area of interest and that might have other business advantages.
If you don't have the time to do detailed research or don't trust your own judgment, you could work with an advisor who may have access to more information about your area of interest.
Know your goals
"Social good" may be defined differently by every investor, and even a socially responsible fund may include multiple definitions of the types of companies that meet its investment objectives.
Also, make sure your expectations are clear and realistic. Many socially responsible investments produce solid financial returns; others may not. Though past performance is no guarantee of future results, you should have a sense of what kind of return you might expect. You shouldn't feel you have to accept mediocrity in order to support your beliefs. Monitor your investment's performance, and be prepared to look elsewhere if your investment doesn't continue to meet your needs, either financially or philosophically.
The clearer you are about the goals you have for your money, the better your chances of selecting appropriate investments.
To learn more about ESG Investing, please reach out to Andrew Scheppegrell at firstname.lastname@example.org .
ESG investing involves the exclusion of certain securities for nonfinancial reasons. This may result in the investor forgoing some market opportunities that may have been available to those not subject to such criteria. There is no guarantee that any investment goal will be met.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
Investors should consider the investment objectives, risks and charges and expenses of the fund carefully before investing. The prospectus contains this and other information about the funds. Contact the issuing firm to obtain a prospectus which should be read carefully before investing or sending money.