What is Socially Responsible Investing (SRI)?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Investing in the stock market might seem like an odd way to help make the world a better place. But with socially responsible investing (SRI), there are more ways than ever to positively impact the world when putting your money to work in the market. SRI, also known as sustainable and responsible investing, is like voting with your dollars: Investing in companies that are pursuing positive change and actively not investing in companies you feel are harming the world.

Total assets under management using SRI strategies in the United States have increased from $8.7 trillion at the beginning of 2016 to $12 trillion at the end of 2017, or one out of four dollars invested under professional management in the country, says Farzana Hoque, spokesperson for The Forum for Sustainable and Responsible Investment, a nonprofit dedicated to advancing SRI.


“Most of these assets are from institutional investors,” she said. “But individual investors are increasingly interested in sustainable and impact investing as well.”

What makes an investment socially responsible?

Money managers and investment experts judge the “social responsibility” of an investment based on the environmental, social, and corporate governance (ESG) of a company. Here are some more concrete examples of what kind of actions a company might take to raise or lower its ESG score in the eyes of SRI analysts:

  • Environmental: If the company’s operations involve spewing an unethical amount of carbon into the atmosphere or dumping tons of plastic into the ocean, it probably won’t receive a favorable environmental rating. Conversely, companies that pioneer innovative green energy technologies would expect a favorable environmental rating.
  • Social: Perhaps the broadest of the three groups of criteria that comprise the ESG, social factors cover everything from whether the company provides adequate parental leave to employees to whether it promotes community development.
  • Corporate Governance: In general, any actions or controversies involved with the internal management policies of the company fall under the category of corporate governance. A company that actively promotes racial and gender diversity on its board of directors would score high in this category, while a company with a record of participating in overseas corruption would score unfavorably.

Where do ESG scores come from?

One of the first questions that should leap to your mind is “How legit are these ESG scores and who is doing the scoring?” The answer is a combination of private analysis firms, such as Sustainalytics and MSCI, along with in-house experts at investment institutions such as Goldman Sachs and JP Morgan Chase all examine whatever data is available on a company to determine its ESG score.

Because each analytical team crunches the data according to its own internal process, the ESG score of a company — not to mention a mutual or exchange-traded fund that consists of multiple companies — can vary depending on which rating agency you or your financial advisor look at.

Does socially responsible investing make money?

The big question for even the most pure-hearted of investors is whether pursuing an investment strategy that takes into account a company’s or fund’s ESG score means losing out on those who happily pour money into tobacco companies or Big Oil. The answer is no, according to many experts.

  • Morningstar, an investment research firm, released a report in February 2019 showing that out of the 56 ESG indexes it examined, 41 outperformed similar indexes that didn’t incorporate ESG into how the companies were selected.
  • Axioma, a company that provides risk-management software to portfolio managers, found in a 2018 study that portfolios including a higher number of ESG investments “rarely underperforms the market, and often outperforms the market, especially over the last few years.”
  • Investment management company BlackRock has a white paper on ESG investing where they blunty asked “Do investors need to choose between returns and ESG? Our answer: no.”

There are reams of reports and analysis speculating exactly why ESG investments perform as well as they do, but for now it’s safe to say you aren’t paying a financial penalty for pursuing an ESG investment strategy.

How to start socially responsible investing

Choosing your investments based on their social impact has gone mainstream, meaning you can easily find a way to dive in no matter how much you want to invest or whether you prefer a robo-advisor or a traditional brokerage.

While you can certainly invest in individual stocks based on ESG scores, the same risks and drawbacks apply as when picking individual stocks without considering ESG — you lack the protection that comes with diversification. Instead consider investing with either a broker or a robo-advisor that offers a portfolio with different funds tailored for an SRI strategy. To help you get started, take a look at robo-advisor Betterment or brokerage Charles Schwab:

Betterment

This robo-advisor already has a lot going for it without considering its SRI portfolio, including its annual management fee of 0.25% for accounts under $100,000 and no minimum deposit. The SRI portfolio Betterment offers doesn’t give you a great deal of insight into what aspect of ESG the companies included excel at — environment, social or corporate governance — but it promises that it has eliminated the stocks of large companies with poor ESG scores from the SRI portfolio.

Charles Schwab

If a traditional broker is more your speed, Charles Schwab offers a laundry-list of more than 200 mutual funds and ETFs they’ve pre-screened as making “investments based on such issues as environmental responsibility, human rights, or religious views.” You’ll have to do some legwork in researching the fund you’re interested in to see what aspect of ESG it focuses on (the Green Century Balanced fund concerns itself with environmental sustainability, for example) but you have the benefit of doing business with what we feel is one of the best brokers around.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Do you have a question?