How to Do Socially Responsible Investing (2024)

Sometimes called ESG investing, it’s all about putting your money where your values are

The hottest trend in investing today, and one you may want to embrace if you haven't yet, is investing in ways that represent your values.

The practice is often called ESG investing (environmental, social and corporate governance), though some dub it socially responsible investing or, in certain cases, impact investing. Years ago, the name was "ethical investing."

How to Do Socially Responsible Investing (1)

Leading the charge toward socially responsible investing: women. A June 2022 survey by the financial research firm Cerulli Associates found that 52% of women would rather invest in companies that have a positive social or environmental impact; 44% of men felt that way.

"When we invest our money in the things that we care about, it makes our money more meaningful to us."

"Women want more than just financial return," Janine Firpo, author of "Activate Your Money" said on the Friends Talk Money podcast I co-host with Terry Savage and Pam Krueger. "We're realizing that when we invest our money in the things that we care about, it makes our money more meaningful to us."

Krueger, founder of the Wealthramp, a firm that vets financial advisors, says advisors tell her that "the clients who are asking these questions [about socially-responsible investing] are women." And, she adds, "lots of women who are close to retirement or already retired seem to want to make a difference with their money."

More Investments to Choose From

Investing this way is becoming much easier to do.

Every major mutual fund and ETF (Exchange-Traded Funds) company now sells ESG products. And according to InvestmentNews, a trade publication for financial advisors, U.S. mutual fund companies last year came out with 70% more of them than in 2020. Similarly, nearly two-thirds of new ETFs last year were ESG-focused.

Roughly two-thirds of financial advisors now use ESG products, InvestmentNews Research has found. A year ago, 59% did.

The Biden administration is expected to reverse the Trump administration's limits on ESG investing in retirement plans this summer, too.

That's apt to make it far more likely that your employer's 401(k) or 403(b) retirement savings plan will offer at least one ESG choice. Currently, according to a 2022 Bank of America study of the 3.1 million participants in the employee benefits programs it runs, only 11% of 401(k) plans offer ESG-focused funds to employees.

ESG Is Not Well-Defined

But investing to follow your values requires more than a little caution, especially if you're interested in buying an ESG mutual fund or ETF. That's because financial firms have a lot of leeway in determining what they mean by ESG investments.

For some funds and ETFs, it's about what they don't invest in. For others, it's about only owning stocks in a particular sector, like green energy. And for others, it's about holding stocks with top ESG ratings, though the data underlying ESG ratings, Kenneth Picker and Andrew King recently wrote in the Harvard Business Review, "are incomplete, mostly unaudited, and often dated."

Some critics have names for sales and marketing efforts that play fast and loose with ESG definitions: "doublespeak" and "greenwashing."

To clamp down on that, the Securities and Exchange Commission (SEC) has proposed rules restricting the use of the term "ESG" by fund companies and ETFs. SEC Chairman Gary Gensler has said: "What we're trying to address is truth in advertising."


The SEC is also expected to start requiring public companies to provide fuller disclosure about their environmental, social and corporate governance practices.

Keep in mind: your own definition of what might be good or bad for the planet might be much different than the one used by particular ESG fund managers and ratings firms and public companies.

It's also hard to know whether a company's self-declared ESG approach is actually working.

As Stanford finance professor Amit Seru wrote in The Promise and Pitfalls of Investing for Change, an article on the university's Graduate School of Business website, "Good luck measuring the impact of an investment on social or economic inequality. The data are messy, crude, and measured with a lag."

Advice for ESG Investing

So, before putting a dime into an ESG fund or ETF, read its prospectus and disclosure materials to see how that firm defines ESG. If you plan to buy a particular stock for ESG reasons, read its annual report and website to learn more about whether its values align with yours.

"You do not give up financial returns when you invest with your values."

Conversely, remember that just because a company is socially responsible, that doesn't necessarily make it a good investment.

Investing this way also can mean paying steeper fees than what you would pay to own traditional mutual funds and ETFs. In their Harvard Business Review article, Picker and King wrote that ESG funds typically charge fees 40% higher than traditional funds. That's not necessarily a reason to avoid investing in these funds, but it is something to consider when gauging your potential returns.

And that leads to the big question you may be wondering: Will I earn a better return with ESG funds and ETFs than with others? Possibly.

"There's been an enormous amount of research that's been done, and it shows unequivocally that you do not give up financial returns when you invest with your values," Firbo said on my podcast. "In fact, you can meet or even exceed the returns that you see in non-sustainable investing."

The key word there is "can."

A Rough 2022 for Many ESG Funds

Many ESG funds have had a rough 2022. Partly, that's because they often don't own any, or many, oil company stocks; that sector has performed well this year. Partly, it's because sustainable funds are often big owners of tech stocks, a sector that's largely been clobbered lately.

According to Morningstar, the fund and ETF research firm, 65% of sustainable U.S. stock funds are at the bottom of their category rankings this year. But over longer periods, most U.S. stock ESG funds have been in the top half of their categories.

The current trend toward ESG investing, however, could help boost potential returns. "As more investors demand socially responsible companies to be included in their portfolios, you could see a little extra push on those stocks as those stocks become in demand," Savage said.

Willing to Potentially Sacrifice Returns?

Regardless, you may be willing to sacrifice potential returns and accept higher fees in exchange for the feeling you'd get by investing with your heart as well as your wallet.

In fact, a 2021 Million Dollar Round Table survey found that 34% of Americans who use financial advisors said they were willing to accept lower investment returns if they could incorporate their personal beliefs into their portfolios.

For help assessing the climate and social impact of ETFs, mutual funds and 401(k) plan investments, the As You Sow nonprofit offers a free online analytic tool. There's also Carbon Collective, which has a three-step questionnaire to let you allocate funds to one of its "climate-forward portfolios."

And Savage suggests considering, which runs six portfolios with assorted sustainable goals that let you focus on your impact priority, from clean water to climate action to animal welfare. Newday donates 5% of its net revenues to nonprofits working in the ESG field where you've made your investments, Savage says.


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How to Do Socially Responsible Investing (2)

Richard Eisenbergis the former Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and former Managing Editor for the site. He is the author of "How to Avoid a Mid-Life Financial Crisis" and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch.Read More

As an enthusiast in the field of ESG (Environmental, Social, and Corporate Governance) investing, I bring a wealth of knowledge and expertise to shed light on the concepts discussed in the article. I've closely followed the trends, developments, and discussions surrounding ESG investing, staying informed about the various aspects and challenges associated with this rapidly evolving field.

ESG Investing: Putting Values into Your Portfolio

ESG investing, also known as environmental, social, and corporate governance investing, has gained significant traction as a prominent trend in the investment landscape. This approach involves aligning one's investment portfolio with personal values related to environmental sustainability, social responsibility, and ethical corporate governance. It is worth noting that ESG investing encompasses a broader spectrum, sometimes referred to as socially responsible investing or impact investing.

Women Leading the Way in Socially Responsible Investing

The article highlights a notable trend where women are playing a leading role in the surge of socially responsible investing. A survey by Cerulli Associates in June 2022 indicates that 52% of women prefer to invest in companies with positive social or environmental impacts, compared to 44% of men. The motivation for such investments extends beyond financial returns, emphasizing a desire to make a positive impact with their money.

Expansion of ESG Investment Products

ESG investing has become more accessible, with major mutual fund and ETF companies now offering a wide range of ESG-focused products. According to InvestmentNews, there has been a substantial increase in the number of ESG products, with U.S. mutual fund companies releasing 70% more in the previous year. The Biden administration's expected reversal of limits on ESG investing in retirement plans is anticipated to further integrate ESG options into mainstream investment vehicles.

Challenges and Caution in ESG Investing

While the popularity of ESG investing grows, the article emphasizes the need for caution due to the lack of a standardized definition for ESG. Financial firms have significant leeway in defining what qualifies as an ESG investment, leading to concerns such as "greenwashing." The Securities and Exchange Commission (SEC) is taking steps to address this issue by proposing rules to restrict the use of the term "ESG" and requiring more disclosure from public companies regarding their ESG practices.

Measuring the Impact and Returns of ESG Investments

Assessing the impact of ESG investments can be challenging, as the data may be incomplete, unaudited, and lagging. The article points out the difficulty in measuring the social or economic impact of such investments. Despite this, there is a growing body of research suggesting that investors may not have to sacrifice financial returns when incorporating ESG principles into their portfolios.

Considerations for ESG Investors

The article provides practical advice for individuals considering ESG investments. It emphasizes the importance of thoroughly reviewing the prospectus and disclosure materials of ESG funds or ETFs to understand how the firm defines ESG. Additionally, investors are encouraged to research individual stocks to ensure their values align with those of the company. It also acknowledges that ESG investing may come with higher fees compared to traditional funds.

Performance of ESG Funds and Investor Sentiment

The article acknowledges that some ESG funds faced challenges in the year mentioned, citing factors such as a lack of investment in oil stocks and the tech sector's performance. However, it suggests that the current trend toward ESG investing could positively impact returns as more investors seek socially responsible companies for their portfolios.

Balancing Values and Returns

The article addresses the question of whether investors can expect better returns with ESG funds and ETFs. While some challenges are noted, including recent performance fluctuations, it cites research indicating that investors can achieve competitive or even superior returns with sustainable investing.

Additional Resources for ESG Investors

The article concludes by offering resources for individuals interested in ESG investing, including tools for assessing the environmental and social impact of investments and platforms that allow investors to focus on specific sustainability goals.

In summary, ESG investing represents a dynamic and evolving landscape, influenced by shifting societal values and a growing emphasis on sustainability. Investors navigating this space should remain vigilant, conduct thorough research, and be aware of both the potential benefits and challenges associated with incorporating ESG principles into their investment portfolios.

How to Do Socially Responsible Investing (2024)
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