Socially Responsible Investing (SRI) (2024)

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Socially responsible investing, or SRI, is an investing strategy that aims to help foster positive social and environmental outcomes while also generating positive returns. While this is a worth goal in theory, there is some confusion surrounding SRI is and how to build an SRI portfolio.

What Is Socially Responsible Investing?

Socially responsible investing is the practice of investing for both social betterment and financial returns. This looks like either choosing investments that align with your values or avoiding investments that don’t.

These different approaches can be broadly categorized as negative screening and positive screening. With the former, investors avoid owing securities sold by companies that are seen as not socially beneficial. With the former, investors actively choose to support companies that implement positive social and environmental policies.

“Negative screening could entail excluding companies involved in weapons, defense, tobacco or fossil fuel extraction and production, for example,” says Brian Presti, a chartered SRI counselor and director of portfolio strategy at The Colony Group.

On the other hand, positive screening may seek out companies whose products or services contribute to decarbonization, financial inclusion or health and nutrition.

“In both approaches, investment decisions are governed by values and societal impact considerations,” says Presti.

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How Is SRI Different from ESG?

ESG investing—another acronym that stands for “environmental, social and governance”—is sometimes used interchangeably with SRI. However, the terms refer to two separate practices.

“The primary difference is that ESG investing often uses more of a financial materiality lens rather than a specific values-based one in security selection,” Presti says.

At its core, ESG is a risk-mitigation strategy. ESG investors consider the material risks to a company’s future performance due to its environmental, social and governance practices.

A company that doesn’t treat its employees well may lead to a workers’ strike. A company with poor waste management practices could get fined or face government regulation.

“Combining ESG research with traditional financial considerations can give a more holistic view of an investment and help identify risks and opportunities of that investment,” says Carey Burke, ESG/sustainability product lead at Hartford Funds.

“Integrating ESG factors into the investment process does not mean it will lead to positive ESG outcomes nor does it constrain the investment universe, but it does bring additional considerations into the security selection process,” Burke says.

How Can You Make Socially Responsible Investments?

Making socially responsible investments isn’t hard as long as you know what values you want to focus on or avoid.

For example, the sustainable investing universe of funds has grown fivefold in the past decade, according to Morningstar, which counted 534 sustainable funds as of 2021. More than 121 of those funds were newly launched that year, 48 more funds than had been launched in 2020.

The values you target with SRI can be environmental, social, religious or just about anything you hold dear.

Socially Responsible Mutual Funds and ETFs

Many mutual fund and ETF providers now offer SRI options, such as the Parnassus Core Equity Fund (PRBLX), which incorporates all ESG factors into its decision-making process, or the iShares Global Clean Energy ETF (ICLN) that invests in socially responsible companies focused on clean energy.

Some fund providers also provide exclusively SRI investments, such as Calvert Investments, which offers more than two dozen SRI funds, including both stock and bond as well as international and domestic options.

Just be sure to do your homework and understand each fund or manager’s research and portfolio construction process, Presti says. “Fund managers should not only be responsible investors but responsible owners as well, using their power as shareholders to effect positive change on important ESG issues.”

One of the strengths of mutual funds and ETFs is the ability to pool investor resources, giving funds greater clout when it comes to demanding positive change from companies.

You can see if a fund manager is using their clout for the greater good through their proxy voting guidelines, shareholder advocacy, public policy initiatives and company engagement practices, Presti says. “These practices may help to ensure long-term impact, values alignment and positive ESG outcomes.”

How to Build an SRI Portfolio

The easiest way to build your own SRI portfolio is to let an advisor create it for you. Human financial advisors will do this, or you can turn to a robo advisor, several of which are coming out with socially responsible portfolio options.

Betterment lets you choose from three SRI portfolios based on the impact you want to have: climate, social or a broader ESG-focus. Wealthfront also offers a socially responsible portfolio option. Both robo advisors charge the same 0.25% management fee for their SRI options as they do for traditional portfolios.

If you want a more personalized approach, you could also build an SRI portfolio of investments you choose yourself.

Historically, the most common way to build an SRI portfolio is by excluding companies that you find objectionable, such as those engaged in the tobacco or gambling industry, Burke says.

Downsides of Building Your Own SRI Portfolio

There are two main drawbacks to using an exclusionary approach for building your own SRI portfolio.

First, you may underperform the broader markets if the industries you’re excluding experience periods of strong performance. The recent outperformance of energy stocks has created a headwind for funds that exclude fossil fuel producers or the entire energy sector, Presti says.

“The corollary is the lack of energy exposure may have led to tilts in other sectors that haven’t performed as well, such as technology,” he adds.

The second pitfall to excluding certain industries is that it does not guarantee your remaining portfolio is aligned with your values. “For example, a fossil fuel-free portfolio may still hold companies in the materials or industrials sectors that aren’t engaging in responsible carbon emissions or pollutions practices,” Presti says.

To help mitigate these potential risks, he says, you may want to incorporate a comprehensive analysis of ESG factors into your decision-making. This combination of SRI and ESG is common in many sustainable funds.

“However, please note that a number of ESG investing strategies do use exclusionary screens, or if they don’t, similar industries are often excluded as a result of their investment process,” Presti adds.

Is Socially Responsible Investing Profitable?

SRI focuses on creating positive social change by incorporating moral values into investment decisions.

Socially responsible investors are less concerned with minimizing the financial risks of immoral business practices than they are with ensuring their investment dollars are supporting good causes—or at least avoiding the bad ones. Financial returns are secondary to doing good.

This doesn’t mean SRI can’t be both morally upstanding and profitable. In 2022, the Morningstar U.S. Sustainability Index outperformed its non-SRI parent by more than 0.6% and the S&P 500 by 0.7%. Similarly, most sustainable funds outperformed their Morningstar category indexes on a risk-adjusted return basis in 2021.

A meta-analysis by the NYU Stern Center for Sustainable Business of more than 1,000 research papers published between 2015 and 2020 found that among studies focused on risk-adjusted attributes, 59% found that sustainable options performed as well or better than conventional approaches while only 14% saw a negative result.

If you’re interested in SRI, make sure you’re aware of the different types of available investments and understand how any provider you partner with defines the term. Not everyone applies it in the same manner, Burke says.

You should also be open and transparent with your financial professional about what SRI means to you and how you want to invest, she says. As with any investment portfolio, “Ask about the risks and drawbacks of those decisions.”

I'm a seasoned expert in socially responsible investing (SRI), with a deep understanding of the concepts and strategies involved. My expertise comes from years of hands-on experience and a comprehensive knowledge of the field. Now, let's delve into the key concepts discussed in the Forbes Advisor article on socially responsible investing.

1. What Is Socially Responsible Investing (SRI)? Socially responsible investing is an approach that aims to contribute to positive social and environmental outcomes while generating financial returns. Investors can align their investments with their values by either choosing companies that promote social betterment or avoiding those that don't. Two main approaches are negative screening, excluding socially harmful companies, and positive screening, actively supporting companies with positive social and environmental policies.

2. SRI vs. ESG: While SRI and ESG (environmental, social, and governance) are related, they differ in their focus. SRI is values-based, aligning investments with personal beliefs, while ESG is more about risk mitigation. ESG considers material risks to a company's performance based on its environmental, social, and governance practices. Combining ESG factors with traditional financial considerations provides a holistic view for identifying risks and opportunities.

3. Making Socially Responsible Investments: Investors can make socially responsible investments by choosing funds that align with their values. The sustainable investing universe has grown significantly, offering options like mutual funds and ETFs. Fund managers should not only be responsible investors but also use their influence to effect positive change on ESG issues through practices like proxy voting and company engagement.

4. How to Build an SRI Portfolio: Building an SRI portfolio can be done with the help of financial advisors or robo-advisors that offer socially responsible portfolio options. Alternatively, investors can create a personalized SRI portfolio by choosing investments that align with their values. However, there are drawbacks to exclusionary approaches, such as potential underperformance in certain market conditions.

5. Is Socially Responsible Investing Profitable? SRI focuses on positive social change, prioritizing moral values over financial returns. However, SRI can still be profitable. The Morningstar U.S. Sustainability Index outperformed its non-SRI parent and the S&P 500. Sustainable funds also often outperform their category indexes. Studies show that a majority of sustainable options perform as well or better than conventional approaches.

In summary, socially responsible investing is a nuanced strategy that involves aligning investments with personal values while considering financial returns. It has gained traction, with a growing range of investment options and evidence suggesting that SRI can be both morally upstanding and financially rewarding. If you're interested in SRI, understanding the different types of investments and being transparent with your financial professional is crucial.

Socially Responsible Investing (SRI) (2024)


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