Socially responsible investing is a relatively new, but rapidly growing investment sector on Wall Street. It’s a process of looking not just at the profitability of a company, but also at the values the company holds, the way in which it conducts business, and the “footprint” it leaves on the world.
On the surface, this seems like a fairly easy investment strategy. You find the companies that align with your own values and concentrate your investment activities accordingly.
In reality, it’s much more complicated than this. Mainly because most companies are engaged in multiple business enterprises, and while they may be socially responsible in some areas, it may not be an across-the-board practice.
First Step: Define What Socially Responsible Investing Means to You
Before engaging in socially responsible investing, you first need to define exactly what this means to you.
In a very general sense, socially responsible investing is mostly about avoiding investments in companies engaging in certain industries or business practices generally considered undesirable. For example, it might tend to favor “clean businesses,” the type unlikely to discharge pollutants and damage the environment. This might make renewable energy companies highly desirable, but not always.
There are different ways to be socially responsible from a business standpoint, and you may find it is virtually impossible to find companies (or funds that invest in them) that don’t engage in some or all of the possible negative practices. Some of these include:
- Unethical, or even predatory, business practices
- Engaging in industries you consider to be immoral, like gambling
- Substantial reliance on foreign labor and supplies (off-shoring of jobs)
- Poor treatment of employees
- Use of child labor in developing countries
- A record of unfair treatment of certain people groups, such as women and minorities
- Political positions you don’t support or condone
- A history or pattern of environmental damage or destruction
- Creating and maintaining product lines or services either unhealthy or downright dangerous
- Religious positions you don’t support
- A history of partnerships with unsavory entities or individuals
- Undesirable political lobbying activities
While this may look like a long list, you could probably add a few more categories to it. Ultimately, socially responsible investing is highly subjective. As most business organizations are likely to be “guilty” of violating one or more criteria — while conforming to others — it can often be a matter of trying to locate the cleanest shirt in a basket of dirty laundry. No business entity is ever completely clean, they will only be relatively so at best.
This isn’t because business is inherently evil either. Virtually all for-profit businesses operate to make money. As such, being “clean” isn’t typically the first order of business.
The Downside of Socially Responsible Investing
However, before you go out and plunge all of your money into socially responsible stocks, you might want to consider the downside of this investing strategy first.
The best investments may not be socially responsible. Just as businesses operate to make money, investors invest capital to do the same. Many of the most profitable companies from an investment standpoint will not fit your definition of socially responsible. If you make it a policy to invest only in socially responsible companies, you may exclude yourself from the most profitable opportunities available. It’s something of an “occupational hazard” of the socially responsible investor. And on the flip side…
Socially responsible companies might not be the best investments. Sometimes companies might make decisions that, while they are positive from an ethical standpoint, have a negative impact on their profit-making abilities. For example, McDonald’s (MCD) recently made headlines by announcing a switch to cage-free eggs. While this is great for the chickens, is it so good for the company’s bottom line? After all, cage-free chickens cost more to raise, and McDonald’s can’t quite raise the prices of its Egg McMuffins to compensate.
Not every business touting socially responsible practices actually observes them. We live in a world awash in marketing spin. This is to say nearly every company would like to describe itself as socially responsible. Large companies may even employ marketing and advertising personnel dedicated to creating this image. Whether this is an accurate description of a company is another matter. Marketing is all about creating a positive image, but this image doesn’t always square with reality.
Going the Fund Route
An way to engage in socially responsible investing is by using funds focusing on the category. There is a large and growing list of mutual funds and exchange traded funds participating in the sector.
One advantage with funds is you can focus on the areas of social responsibility you consider to be the most important. Many funds are set up to invest in companies observing very specific criteria.
There are some caveats with funds as well. Once again, it may be difficult to find the one fund most closely matching your concerns. As it is a relatively new sector, you may not find too many funds with more than a few years of investment experience and results.
Also, socially responsible investing is something of a “boutique” offering, and may come with higher than usual load fees. And of course, the funds may not be doing as well as an S&P 500 index fund.
Using Robo Advisors
Several robo advisors have burst onto the scene with special portfolios designed for socially responsible investing. With fees as low as 0.25% (or even free), this is a much cheaper route than investing in a mutual fund.
We’ve reviewed a lot of robo investing services at Investor Junkie, and some of our favorites are now featuring SRI portfolios. These include Wealthfront and Betterment. (Betterment has also recently unveiled its own Charitable Giving feature if you’d like to donate shares to your favorite charity.)
But there are also two other platforms, Swell Investing and Wealthsimple that were designed specifically to help their users invest in SRI. While these may not be as great performers as non-SRI-focused portfolios, they’re worth a consideration if you’re thinking about investing in this manner.
DIY Socially Responsible Investing
If you have the time and patience to pick and choose your own stocks, you can make sure you invest only in those stocks most closely matching your own concept of socially responsible business behavior.
Be sure to be thorough in investigating any company you want to invest in. It is highly possible a company with an excellent track record on labor relations and the environment may have significant subsidiary operations involved in businesses outside of your scope.
Also understand companies are never static. Large ones in particular buy and sell operations on an ongoing basis. The acquisition of a single undesirable line of business could change your entire view of a particular company as it relates to social responsibility.
Investing in socially responsible companies is a noble effort. Just be aware of the limitations, and understand it will never be a totally perfect endeavor.