Perhaps money can’t buy love, but it can make the world a better place. Surprisingly, doing good, once the central purpose of philanthropy, is now emerging as a key focus of many investors. What’s causing this momentum? Socially responsible investing, commonly referred to as SRI.
Here at Woven Capital, SRI is our default. We are passionate about the difference that socially responsible investing can make, and it is a central tenet of our philosophy. Through years of experience, we believe it’s possible to create a strong investment portfolio while also promoting the welfare of the environment.
Is it right for you? Let’s dive in and find out.
What Makes An Investment Socially Responsible?
SRI is an investing strategy that aims to generate financial gain for the investor while advancing ethical changes and social responsibility. It’s an approach with many names, such as value-based investing, sustainable investing, or ethical investing. You may also come across a definition of SRI as sustainable, responsible, and impact investing.
No matter the monikers, SRI appeals to investors who want to invest in companies that pursue a positive sustainable or societal impact through value-aligned business practices, production processes, choice of technologies, and so forth.
Past SRI trends supported issues such as civil rights, women’s rights, and anti-war efforts. Today’s socially conscious investors typically focus on companies that promote clean energy, social justice, or environmental preservation.
While not new, SRI has gained many new followers in recent years. In 2019, 85 percent of individual investors expressed interest in sustainable investing, according to a Morgan Stanley survey, an increase of almost 10 percent compared to 2017.
The number of sustainable funds has also surged. In 2020, investment researcher Morningstar identified more than 300 sustainable mutual funds and exchange-traded funds, about three times as many as in 2014.
Are you ready for SRI?
The Three Factors of SRI
SRI investments tend to fall into three broad areas: environmental, social, or governance, commonly referred to as ESG investing. Potential investors will want to examine a company’s business practices, revenue sources, and environmental impact and then determine whether or not those factors align with their values. For example: How does a company treat its employees, support social justice causes, commit to lowering its carbon footprint, etc.
To illustrate, consider this information from one of our recommended funds, the 2020 US Sustainability Core 1 Portfolio (Dimensional Fund Advisors, DFSIX), which invests in companies with low greenhouse gas emissions.
These companies collectively produced 30 tons of CO2 per million in sales, compared to 149 tons of CO2 per million in sales produced by the companies held in the Russell 3000 Index, an index of the 3,000 largest public companies in the U.S.
This difference resulted in a nearly 80 percent reduction in emissions. Furthermore, 83 percent of the fund’s portfolio consists of companies that ranked from neutral sustainability to most sustainability, compared to 68 percent of the Russell 3000 portfolio.
If you’re passionate about environmental impact, you will most likely choose to add funds like the US Sustainability Core 1 or similar to your portfolio.
How good is doing-good for your bottom line?
Studies are showing that SRI strategies hold their own compared to standard investing practices. With many of the funds pursuing long-term capital appreciation, they not only match the performance of traditional mutual funds, but they tend to be less volatile. That’s good news if you value both strong morals and strong returns.
How You Can Be a Socially Responsible Investor
Are you ready to align your investment portfolio with your personal values?
SRI is essentially the same as standard investing except that you also factor in company ethics and social responsibility. Always remember that past performance is no indicator of future performance and returns aren’t guaranteed—no matter how high the moral standards.
- Start by defining what “socially responsible” means to you. There is no single best answer. Since everybody has different values, priorities vary. You may focus on green energy; your best friend on minority-led companies, and your tennis partner on businesses providing fully paid employee benefits. Tobacco companies may be a no-no for you, but acceptable for others. It’s all a personal judgment call.
- Then determine which companies meet your criteria of SRI by reviewing prospectuses and news coverage from reputable media sources. You want to appreciate one important distinction: Some value-based funds merely exclude companies or industries that don’t meet certain ethical standards, e.g., arms and ammunition manufacturers. Others strategically invest in companies with specific, sustainable practices or products. Do you spot the difference? Also, decide if you prefer individual stocks, mutual funds, ETFs, etc.. If you find the research daunting, don’t hesitate to turn to your financial advisor for guidance.
- Start slowly if you like. You don’t need to fill your portfolio with nothing but socially responsible investments right off the bat. Pick a couple of core values and build from there.
- As with any other investment, balance risk, and return. You want to know your risk tolerance and your financial objectives, understand a company’s financial outlook, and pay attention to a fund’s expense ratio.
Most people care about our world and want to do their part to make it a better place. For that reason, socially responsible investing will undoubtedly become even more popular—and important—in years to come. SRI can be a great investment for your money and your mind.
If you want to explore how to put your money toward positive change and financial gain, please contact us.