Socially responsible investing is a relatively new but fast-growing investment sector on Wall Street. This involves three things that are at least as important as the profitability of a company:
- The values the company holds.
- The way in which it conducts business.
- 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. This is 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.
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 you consider undesirable. For example, it may tend to favor “clean businesses,” the type unlikely to discharge pollutants and damage the environment. This may 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 (offshoring 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.
- Religious positions you don’t support.
- Political positions you don’t support or condone.
- Undesirable political lobbying activities.
- A history of environmental damage or destruction.
- Creating and maintaining product lines or services either unhealthy or downright dangerous.
- A history of partnerships with unsavory entities or individuals.
This may look like a long list, but you could probably add a few more categories to it. Ultimately, socially responsible investing is highly subjective. Most business organizations are likely to be “guilty” of violating one or more criteria — while conforming to others. So, 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 be only relatively so at best.
It’s not that 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.
However, before you go out and plunge all of your money into socially responsible stocks, you may first want to consider the downside of this investing strategy.
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” for the socially responsible investor. And on the flip side…
Socially responsible companies may not be the best investments. Sometimes companies may 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. This is great for the chickens, but is it 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.
One 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 (ETFs) 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.
Here’s a list of the 10 largest socially responsible ETFs in terms of assets (as of March 2018):
|iShares MSCI KLD 400 Social ETF||DSI|
|iShares MSCI USA ESG Select ETF||SUSA|
|iShares MSCI ACWI Low Carbon Target ETF||CRBN|
|SPDR SSGA Gender Diversity Index ETF||SHE|
|SPDR S&P 500 Fossil Fuel Reserves Free ETF||SPYX|
|iShares MSCI EM ESG Optimized ETF||ESGE|
|iShares MSCI EAFE ESG Optimized ETF||ESGD|
|Global X S&P 500 Catholic Values ETF||CATH|
|FlexShares STOXX Global ESG Impact Index Fund||ESGG|
|SPDR MSCI EAFE Fossil Fuel Reserves Free ETF||EFAX|
Here’s a list of 10 of the best-performing socially responsible mutual funds:
|Fidelity Select Environmental and Alternative Energy Portfolio||FSLEX|
|Parnassus Endeavor Investor||PARWX|
|Eventide Gilead N||ETGLX|
|Calvert Emerging Markets Equity I||CVMIX|
|Calvert International Opportunities I||COIIX|
|Ariel Fund Investor||ARGFX|
|Eventide Healthcare & Life Sciences I||ETIHX|
|Invesco Summit P||SMMIX|
|American Century NT Emerging Markets Institutional||ACLKX|
Several robo advisors have burst onto the scene with special portfolios designed for socially responsible investing (SRI). 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, as well as a new special portfolio designed with an SRI slant.)
Another robo-investing service that we’ve reviewed, M1 Finance, has an investing “Pie” or motif devoted to socially responsible investing options. For this portfolio, M1 teamed up with Nuveen to offer funds with a slant toward environmental, social, and ethical-government investments. The funds also avoid vice investments such as alcohol, firearms, gambling and tobacco.
And then there’s Personal Capital. The personal finance app has partnered with Sustainalytics, a research firm with more than 25 years’ experience in the SRI space. Together, they’ve created a Socially Responsible Personal Strategy portfolio that screens U.S. equity holdings taking environmental, social and governance (ESG) factors into account. The portfolio has all of the features of Personal Capital’s core portfolios.
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.
|Betterment||Digital – 0.15-0.25%/year; Premium – 0.30-0.40%/year|
|OpenInvest||0.50% (plus an additional 0.22% if you opt for the green bond fund)|
|Wealthsimple||$0 to $100k – 0.50%/year; $100k+ – 0.40%/year|
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.