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A quick guide to socially responsible investing

Rounding it up

  • Socially responsible investing (SRI) involves thinking not only about the return, but also the role that money plays in the economy and the world.

  • SRI has grown in popularity over the last several years, to the point that most companies, investment houses, and fund managers have it top of mind.

  • You can do your own SRI evaluation to determine if a company or fund meets your value set. Just keep in mind that it all starts with educating yourself.

3 min read

Dan Bucherer
#investing#investments#socially responsible investing#SRI

More than ever, investors of all stripes, from large institutional companies to individuals investing for themselves, are cognizant of where they’re putting their money. In short, they’re conscious of socially responsible investing, or SRI. This form of investment involves thinking of both the return (because if you’re investing, you want to make money), but also the role that money plays in the economy and the world.

Whether you’re concerned about ethical investment opportunities — like companies that focus on helping their communities — or green companies that help fight climate change and protect the earth, there are socially responsible options for you. Let’s take a look at a few, as well as the methods and strategies you can use to maximize both your return and societal impact.

Socially responsible investing — what and how common is it?

Socially responsible investing (SRI), also known as Environmental, Social and Governance (ESG), is a great way to broaden the impact you have, while promoting the long-term growth of your investment portfolio.

While once considered radical, SRIs have emerged as an important and valuable strategy. In fact, nearly 17.1 trillion USD are being managed according to sustainable strategies, and these investment opportunities are only set to grow in the next few years.

Companies and investment houses are increasingly including ESG statements with the various shares, funds, ETFs, and mutual funds they offer to the public. While tedious, these statements allow consumers to understand exactly what makes the investments in question socially responsible.

For example, an investment firm may offer an index fund that focuses on green energy. This would likely include electric car makes, solar panel manufacturers, and companies that offer fossil fuel alternatives or use green ingredients. If you’re someone who values green energy, this is the fund for you. If instead, your passion lies in public health, a fund focusing on hospitals, pharmaceutical companies, and medical device manufacturers with  strong philanthropic efforts may be a better fit.

Despite its rising popularity, many SRIs are met with doubts. You may find yourself asking,“Is it really a smart investment strategy?” And we’re happy to report, it actually is. Studies show that investments that are built around socially responsible practices are, regardless of asset class, far less volatile in the market. This means that over the long-term, SRI investors tend to make more money.

What exactly goes into SRI?

SRI or ESG ratings are produced by any number of companies and operate on various different methodologies. One of the most common SRI rating companies in the world is Toronto-based Corporate Knights.Their annual report Corporate Knight Global 100 list records the top companies with a particular focus on sustainability. They look at a whole slew of metrics  to determine which company is the most sustainable.

Another popular rating company is MSCI. This corporation ranks companies on a scale from “Leader,” meaning they are ahead of the curve, to “Laggard,” meaning they’re way behind.

How do I get into socially responsible investing?

While you don’t need the complex calculations that places like The Corporate Knights use, their measuring categories provide a very good road map for your own SRI investment strategy. Consider factors like:

  • Relevance - What role does the company play in today’s society? How impactful are they?

  • Transparency - How open is the company about its finances and goals?

  • Objectivity - Yes, most companies are out to make money, but do they have social issues in their psyche as well?

  • Public data - Take a look at the data available about the company and understand the sustainable practices they’ve put in place.

  • Comparability - Compare and contrast companies in similar segments to determine which best aligns with your values.

  • Engagement - How “out there” is the company on the issues about which you care most?

  • Stakeholders - What role do shareholders play? Will you have a legitimate seat at the table to guide the company?

If you elect to work with an investment company who is providing funds in which you can invest, they’re likely doing this work for you. Even if you’re investing on your own via one of the many apps now on the market, you can participate in funds that support various causes.

Beyond this, socially responsible investing practices are just like those of any other kind of investment. Make sure that your portfolio is well diversified, that you are set up appropriately for your phase in life, and that you have enough liquid cash.

Dan Bucherer

Dan is a runner and writer living in the Washington, D.C. area, where he currently works for a financial services trade association as the Communications Director.

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