Investments is no longer limited to generating financial returns alone. A more conscious approach towards investing is gradually gaining momentum - socially responsible investing (SRI). By integrating personal values with investment decisions,

Socially responsible investing (SRI)

Typically, socially responsible investing is targeted towards companies with a substantial positive social or environmental footprint, such as those in the renewable energy sector, and are steered away from organizations having a detrimental impact.

While SRI is often interchangeably used with sustainable investing, ethical investing, and values-based investing, its core idea remains the same – to combine financial gains with sustainable, responsible, and impactful investment practices. Often, SRI integrates the Environmental, Social, and Governance (ESG) factors, collectively known as ESG investing, to establish an investment framework.

Trend of Socially Responsible Investment

In the past, when people didn’t know what is socially responsible investing the notion of intertwining social consciousness with investing was considered radical and unconventional. However, recent trends indicate a growing interest in SRI, proving its increased acceptance among investors. A 2019 survey by Morgan Stanley revealed that individual investor interest in sustainable investing surged to 85%, an impressive increase from 75% in 2017. The options for sustainable investment have expanded concurrently. According to Morningstar, there were 303 sustainable open-ended mutual funds and exchange-traded funds in 2019, a considerable leap from 111 in 2014.

How Does SRI work?

Investors practicing SRI aim to align their investments with their personal values. Hence, the definition of SRI may differ from one investor to another based on their individual values and preferences. For instance, an investor passionate about environmental sustainability may choose to invest in renewable energy companies, while someone advocating for diversity and inclusion may opt for mutual funds investing in women-led companies or Black-owned businesses.

In SRI, the investment decisions are often equally influenced by the companies an investor chooses to avoid as the ones they invest in. Therefore, an investor may divest from a company if it engages in practices that are inconsistent with their values.

Some SRI funds may align with your values, while others might not. For example, Vanguard’s VFTSX fund, which screens for certain ESG criteria and excludes stocks from industries like fossil fuels and nuclear power, holds stocks of Amazon and Facebook. This may seem surprising as some SRI investors choose not to support these companies.

Performance and Cost of SRI

One critical concern among potential SRI investors often relates to the what is socially responsible investing and financial performance of SRI funds. As per a 2020 study by Arabesque Partners, 80% of the reviewed studies showed that sustainable practices positively influence investment performance. This, coupled with evidence of lower volatility in SRI funds, dispels the skepticism regarding the financial performance of SRI.

Traditionally, SRI funds were associated with higher fees than their traditional counterparts. However, 2019 data from Morningstar reveals that out of more than 40 diversified ETFs following ESG criteria, 13 charged expense ratios between 0.09% and 0.2% per year – considerably low fees. While there are more expensive SRI funds, affordable options are available as well.

For instance, the Fidelity U.S. Sustainability Index Fund (FITLX), with an expense ratio of 0.11% and a higher-than-average portfolio sustainability score of 50, is an attractive option. As per Morningstar, the average asset-weighted expense ratio across all passive funds was 0.13% at the end of 2019, which is slightly higher than Fidelity’s sustainable fund.

Building your SRI portfolio

Creating a socially responsible investment portfolio does not need to be an intimidating task. Here is a step-by-step guide to help you build an SRI portfolio:

Determine the level of assistance you need: You can either create your own SRI portfolio by selecting and managing your investments or enlist professional help. Robo-advisors are a convenient option as they leverage algorithms to create and manage an investment portfolio based on your risk tolerance and investment goals. They are cost-effective and offer SRI portfolios, thereby eliminating the hassle of identifying ethical investments.

Open an investing account: To kickstart your investment journey, you need to open a brokerage account. Certain brokerages, like Merrill Edge and Fidelity, offer robust SRI options along with screening tools to aid in fund selection.

Define your values: Clearly articulating your values can facilitate better investment decisions. Specify your stance on various industries and business practices to ensure your investments align with your beliefs.

Conduct thorough research: Upon setting up a brokerage account and identifying your priorities, you can start building your portfolio. Be cautious while investing in individual stocks, as they should ideally comprise 5%-10% of your portfolio.

Evaluate the company’s sustainability reports, diversity in their board of directors, and employee satisfaction levels while making a decision.