One of the easiest ways to make a difference to any worthy cause is to donate money toward it. While money can’t solve every problem, it can make a difference if you know exactly where to put your cash. If you want to make your voice heard, but at the same time, need to find a way to benefit your portfolio, socially responsible investing could be your ticket.
What is it and what causes could it affect?
Socially responsible investing (SRI), or social investment, is an investment strategy which considers both financial return and social/environmental good to bring about a positive change.
According to the Forum for Sustainable and Responsible Investment (US SIF), there is no single approach to SRI, nor is there one single term that describes it. Depending on investor emphasis, any of the following terms can mean the same as socially responsible investing:
Socially responsible investing could enable you to affect change in the following areas: the environment, consumer protection, anti-gun violence, religious beliefs, employee rights, pay gaps, animal welfare and more.
You can invest sustainably when you use an online investment platform such as TD Ameritrade, check out a robo-advisor, consult with your financial advisor or check into your workplace’s SRI funds.
SRI assets in the United States
According to the 2018 biennial Report on U.S. Sustainable, Responsible and Impact Investing Trends, total U.S.-domiciled assets under management (AUM) using sustainable investment strategies grew from $8.7 trillion at the start of 2016 to $12.0 trillion at the start of 2018, a 38 percent increase. This represents 26 percent — or one in four dollars — of the total U.S. assets under professional management.
According to JP Morgan, half of all assets are managed in Europe and more than a third are managed in the U.S. The growth of funds that specialize in environmental, social and governance (ESG) factors are up over 200% from the past decade and exchange-traded fund (ETF) popularity in these areas have also increased, to $11 billion in assets under management in 120 funds throughout the world.
One thing is obvious — this SRI explosion isn’t going away anytime soon. In fact, the trend is now over 35 years old and has steadily gained popularity since Trillium Asset Management, the oldest investment advisor devoted specifically to SRI, was founded in 1982.
How to get started in socially responsible investing
Farzana Hoque, Research and Communications Consultant for US SIF, the membership association for professionals, firms, institutions and organizations engaged in responsible and sustainable investing in the United States, says that the best way to learn is to do some in-depth research.
“What individuals should do first is learn about what sustainable investing is. There are lots of ESG criteria,” Hoque says. “For example, there’s addressing the environment through clean technology and waste management. There are social criteria such as human rights, diversity and inclusion, and governance criteria, such as CEO pay and political spending. You can also avoid certain companies like tobacco or weapons companies. There are several issues a person can be thinking about and different strategies for sustainable investing.”
If you’ve never invested before, one of the first steps is to understand that you’ll need a broker or an individual who executes trades and is paid a commission when you buy or sell securities. Brokerage firms can be online firms like TD Ameritrade or can also be full-service brokers. You make all your own investment decisions when you choose an online broker, whereas full-service brokers give you advice about what to invest in.
Whether you go the online broker route or choose a full-service broker, it’s important to know the step-by-step basics of how to buy an SRI product:
Step 1: Identify your investing goal.
One of the most important steps besides actually opening an account with an online brokerage is to determine your investing goals and time horizon. Do you need money in five years? Ten or more? Understanding your timeline will help you think through which investments you might choose and exactly what you should put into your investment portfolio.
Step 2: Determine your risk tolerance.
How comfortable are you with risk? Are you willing to stick your money in a single stock (riskier) or do you prefer a portfolio that’s chock full of bonds (much less risky)? Or are you somewhere in the middle, and favor a portfolio of well-diversified mutual funds that have a mix of stocks and bonds?
An understanding of your risk tolerance will help you determine what types of funds to dive into. Note: When you diversify, you spread your assets around to reduce the risk of investing in one specific type of asset. The more diversified your investments are, the less volatile your portfolio will be.
If your SRI investments are meant to be retirement assets, be sure they match your risk tolerance as time goes on. If you’re younger, you might want to consider a riskier mix of assets, and if you’re nearing retirement age, you’ll want to consider more conservative investments.
Step 3: Research brokerages.
At the outset of 2018, the US SIF’s U.S. Sustainable, Responsible and Impact Investing Trends 2018 report identified $11.6 trillion in ESG incorporation assets under management held by 496 institutional investors, 365 money managers and 1,145 community investing financial institutions.
There are so many options to choose from, so research the brokerage that best caters to your timeline and needs. For example, TD Ameritrade offers well-diversified Socially Aware Portfolios, and you can choose from any number of exchange-traded funds (ETFs), but maybe TD Ameritrade’s fees don’t suit your budget. Maybe there’s another brokerage that has the SRI ETF you want at a lower price.
Step 4: Define your ethical guidelines.
Make a list of what’s important to you. Maybe you have ten different SRI areas you’re interested in melding together. Maybe you’re wildly passionate about something really specific. Whatever your interests, look for mutual funds or other securities that meet your qualifications.
Step 5: Deposit your money into the brokerage account of your choice.
Once you’ve deposited money into a brokerage account, you can use that money to buy shares of the types of SRI assets you’re interested in purchasing. Decide how many shares you want, and keep track of the fund’s performance every few months.
Step 6: Divest from current non-SRI stocks you support.
Take a look at your current portfolio (if you have one) and consider divesting from any assets that don’t fit your socially responsible objectives. Divesting, the opposite of investing, is the process of selling an asset in order to meet your financial, social or political goals. Often, you can sell your assets and reinvest them into your SRI funds, and that’s particularly easy to do if your divested funds are in the same brokerage firm as any new SRI funds you’ve invested in.
What to look for when selecting an SRI broker or advisor
You might have an idea in mind of what types of SRI funds you might be interested in, and you may have narrowed your list down to a few brokers. How do you actually hone in on just one among over 1,000 financial institutions?
“There are financial professionals and institutions that have been doing this for a long time, and they have a track record and reputation,” Hoque says. “You can reach out to a financial advisor that has sustainable investing expertise. If you already have a financial advisor, ask them if they know about and offer sustainable investing services and products, and if they don’t, you can consider using another financial advisor that does have expertise in this area. You can also look into robo-advisors. These are online wealth management services that use automation and algorithms, and it’s a great option for younger people who prefer digital services.”
Hoque suggests checking out the U.S. Forum for Sustainable Investing (USSIF)’s list. However, some of the funds on the USSIF list are load funds, and others have very high minimum investments ($1 million), so you might need to make sure to focus on no-load funds with lower minimums. If you click on the “account minimums” tab, it’s easy to see which funds are available for as little as $1,000.
Hoque says it’s not necessary to go to great lengths to “reinvent the wheel” when it comes to searching for ways to invest. She says you can simply check into your 401(k) or 403(b) retirement plan to see if any SRI options are available. If not, express your desire for SRI options to your human resources department. Many major plan administrator platforms have an open structure that enables them to add new funds to the platform.
Types of sustainable, SRI and ESG issues
It can be mind-boggling to understand all of the different environmental, social and corporate governance ESG criteria you could possibly consider as you invest. Here is a breakdown of the causes your investments can tackle:
Is socially responsible investing right for you?
There are many interesting options out there, and Hoque says that there are now a lot of SRI companies and products have been around for a while, which gives the industry more familiarity. Hoque believes that if you take time to research your SRI options, you might find that the more you learn about the field and what’s available, the more interested you might become.
“There are a lot of sustainable investment options out there now that you can consider,” she says. “Many institutions have been doing this for a long time, and there are newer entrants coming in as well. It’s a growing and evolving industry.”
Cheat sheet: Terms you need to know
Socially responsible investing is a broad field with many overlapping components. While not an exhaustive list, here are a few important terms to know as you consider your socially responsible investing options:
Refers to voting on company shares and/or engaging company management and boards of directors on environmental, social and corporate governance (ESG) issues and business strategy issues.
Cleantech refers to products, services and processes that reduce or eliminate ecological impacts or require fewer resources to create. Cleantech is an investment theme and may include investments in agriculture, energy, manufacturing, materials, technology, transportation and water.
Community impact investing
Community impact investing is investment capital directed to underserved communities by traditional financial services institutions. Community impact investing can involve access to credit, equity, capital and basic banking products.
Corporate social responsibility (CSR)
CSR takes into account economic, social, environmental and ethical impacts for corporations.
Environmental, social and corporate governance (ESG)
Investment processes that factor in environmental, social, and corporate governance factors.
The fair treatment and inclusion of all people in all issues, from development, implementation and enforcement of environmental laws, regulations and policies.
An investment philosophy guided by moral values, ethics or religious beliefs.
An investment philosophy that relates to environmental impact.
Mission-based investing revolves around an organization’s mission in its investment decision-making process. Typically, these organizations are 501(c)(3) nonprofit organizations.
A strategy of avoiding investing in a company which has practices that are harmful to individuals, communities or the environment.
A strategy of analyzing companies with strong corporate social responsibility (CSR) performers or otherwise incorporating positive CSR factors into the investment analysis process.
Stocks that belong to publicly traded companies either involved in or associated with activities considered to be unethical or immoral.
Sustainable, responsible, impact (SRI) investing
Sustainable, responsible, impact (SRI) is an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of financial investments.
The idea of how to meet present needs without compromising future generations’ ability to meet their needs. Sustainable development considers social justice, protection of the environment, efficient use of natural resources and economic well-being.