We all want to make money from our investments, but some are more concerned than others about who they’re investing with, and how that company is generating income.
Those who have strong feelings and opinions about where they want to invest their money participate in what’s commonly known as socially responsible investing, or SRI. Other names for this strategy include ‘ethical investing,’ or ‘sustainable investing.’ Whatever you call it, it’s ultimately about making sure your investment strategy fits with your personal values.
Whether you focus on investing in environmental-, racial- or gender-based causes (known as positive screening) or choose to avoid buying stakes in businesses that produce alcoholic beverages, tobacco products, oil and gas, or weapons (negative screening), there are plenty of different ways to make your investments more meaningful to yourself, and to others.
As socially responsible investing becomes more popular there are many more investment options, too, such as mutual funds and ETFs that allow people to invest in a basket of socially responsible businesses.
What is ESG investing?
ESG investing is a strategy that judges an investment target based on environmental, social, and governance criteria.
Some people consider ESG investing a form of socially responsible investing, but not all ESG investments are driven by the same kinds of personal values that are behind most ethical investments. ESG investing is more of a risk-mitigation strategy that evaluates potential investments, and their risks, based on the company’s environmental, social, and governance practices.
Is SRI as profitable as other investing?
As with ‘regular’ investing, those practicing SRI hope to generate returns from their investments. However, not all socially responsible investments are as lucrative as more traditional investment options. Those who choose to make socially responsible investments should do their research and make themselves aware of what kind of returns they can reasonably expect.
In general, however, socially responsible investments tend to match or exceed the performance of most mutual funds. In some instances, socially responsible investments have been shown to be less volatile than other investments, with fewer price fluctuations.
How do I get started with SRI?
You can set up a socially responsible investment portfolio by choosing specific funds or investments yourself, with the help of a financial advisor, or by buying socially responsible funds through a robo-advisor.
If you do choose to buy SRI funds, it’s important to take the time to understand and learn what’s in them. In some cases, while funds may exclude oil and gas companies, for example, they may still include other businesses that don’t fit with an individual investor’s tastes and values.
What are the cons of SRI?
The primary downside of socially responsible investing is the risk of underperformance. This tends to happen when an investor excludes a sector or industry from their portfolio, and that sector drives the market for a period of time. It’s hard to benefit from a rally in fossil fuel stocks if you don’t own any investments in that area, for instance.
The other potential risk is choosing a portfolio that doesn’t accurately reflect your values. While it’s relatively easy to exclude defense and weapons manufacturers, it can be difficult to know with certainty whether the other businesses you do choose to invest in are living up to the example you want them to.