What to Ask Your Advisor if You’re Interested in Socially Responsible Investing

by Sandy John

By Sandy John

“Socially responsible investors” is the term used for people who want their investment to do more than just provide a good return. They also want their investment to benefit society in some way.

Socially responsible investing, or SRI, is the most common name for this practice, although you’ll run across other names as well, including ethical investing, ESG (environmental, social and governance) investing, sustainable investing, and impact investing. The terms are not completely interchangeable, but they all refer to various forms of investing in a way that aligns with your values.

Some people use the terms “double bottom line” or “triple bottom line” investing, with the bottom line being the financial return, the second bottom line being the social impact, and the third bottom line being the environmental impact resulting from the investment.

The idea behind socially responsible investing is simple – you want to invest in companies whose policies support your values, and you don’t want to invest in companies that go against your values. But how do you know which companies meet your criteria?

Socially responsible investments are particularly popular with millennials and women investors, with more than 80 percent of millennials saying they’re interested in the idea.

More than $12 trillion in assets under management is invested using an SRI strategy, with most of the money invested in companies that meet various environmental, social, and corporate governance standards. In fact, one-quarter of all the money managed by professionals is involved in SRI, according to the Forum for Sustainable and Responsible Investment.

If you’re interested in socially responsible investments, your advisor can help you find investments that match your values. The first step is determining which issues and causes are most important to you. For instance, if you’re concerned about the environment, you might want to invest in companies that show commitment to the environment through actions such as using renewable energy.

Some of the criteria people use in selecting responsible investments include climate change, labor relations, community development, avoiding production of harmful products such as tobacco or firearms, and corporate political contributions.

How can I find SRI investments?

There are a few ways to approach finding investments that meet your definition of socially responsible.

Negative screens. With this approach, you or your advisor will review your portfolio looking for companies that don’t match your value profile. For instance, if you want to support the environment, you might want to screen out petroleum producers and coal mining companies.

Positive screens. With a positive screen, you look for specific companies that are actively supporting your values. If one of your values is diversity, for example, you might seek out companies that promote diversity in their workforce.

You can also be a socially responsible investor by taking part in shareholder holder votes for stocks you own. Investors have the right to file shareholder resolutions asking the company they own stock in to take specific actions, such as reducing the company’s carbon footprint or cutting ties with overseas factories that employ child workers. Even if a proxy doesn’t pass, holding the vote forces companies to publicly consider issues that they may have previously been able to avoid.

If the thought of screening individual companies to determine whether their values align with yours sounds like a lot of work, there’s an alternative.

With a socially responsible mutual fund, you can rely on the investment manager to screen the companies and  ensure their policies match the goals of the fund. Make sure you understand the composition of the fund, however. Some index funds simply overweight investments that score well on certain responsibility measures, while others eliminate those that score poorly.

Does socially responsible investing affect returns?

You might wonder if being a socially responsible investor carries a cost – do you get lower returns with SRI compared to a non-screened investment? Many factors include the return on any investment, but study after study shows that socially responsible investments have returns that are very similar to broader market returns.

That reflects a growing awareness among investors that companies that making socially responsible business choices is good for business. For example, a company that can reduce its carbon footprint might also be able to lower its energy costs, and companies that emphasize diversity might be able to attract better talent, giving them a competitive edge.

That makes companies that score well on SRI factors more attractive in more traditional business measures. In other words, it is possible to use your investments to do good while your money performs well.

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