What Is Socially Responsible Investing (SRI)? (2024)

If you’re a current investor or looking to start your investment journey, it’s important to consider how your money can impact society and the environment. Right now, the conversations around investment options are shifting as more investors make investment decisions that reflect their values and beliefs on social and environmental responsibility.

A 2018 survey by the Morgan Stanley Institute for Sustainable Investing showed that over 75% of people were interested in Socially Responsible Investing – but what is Socially Responsible Investing?

Defining Socially Responsible Investing

According to Investopedia: Socially Responsible Investing is “an investment that is considered socially responsible due to the nature of the business the company conducts.”

Socially Responsible Investing is often used interchangeably with Environmental, Social, and Governance (ESG) investing. Both terms are considered an investment “approach that considers factors beyond risk and returns, like climate change, labor management, corporate governance, and many others.” (Charles Schwab)

This value-aligned investment approach helps create long-term competitive returns while also contributing to positive social and environmental impact.

A Brief History Of Socially Responsible Investing (and ESGs)

Religious groups dating back to the 1700s have refused to invest in practices prioritizing profit over social welfare and withheld money from companies involved in the slave trade, weapons of war manufacturing and distribution, gambling, and more.

Following a similar practice, the 1960s saw investors back feminism, workers’ rights, and civil rights. In the 1990s, investment in South Africa stopped in response to its apartheid policy.

Today, current issues like climate change, fair trade, gender pay gap, and animal welfare have guided investors towards companies actively improving these particular societal and environmental initiatives.

The Impact Of Socially Responsible Investing

Socially Responsible Investment strategies are growing. The Global Sustainable Investment Alliance annual review showed that SRI grew to over $35 trillion in 2020 (up 15% since 2018) and is expected to rise as greener policies, unethical business practices, environmental impact, and company transparency is increasingly demanded by investors.

Janine Firpo, the co-founder of Invest for Better and the author of Activate Your Money, explains that “socially responsible investing has already started to change the economy. Funds are shifting away from enterprises that do harm to companies that have more forward-thinking, sustainable business models.”

Why You Should Consider Socially Responsible Investing

There are personal and global benefits to taking a sustainable investment approach. Not only does an SRI strategy enable you to receive financial returns comparable to traditional investments, but you’re also promoting the change you want to see in the world by investing in companies that value fair and responsible practices.

To help you understand the benefits of SRI, let’s expand on each of these points.

The Impact Of Voting With Our Dollars Is Huge

Your monetary investment has the potential to positively influence progress in social, environmental, and political situations both locally and around the world. Just as you can invest your money in a do-good company, you can also refuse to contribute money to particular companies actively participating in practices you disagree with. Use your money to vote for the change you want to see in the world!

For example, if you want to reduce the fossil fuel industry’s effect on global warming, consider investing in solar or wind energy instead of oil and gas. If you are an animal rights advocate, avoid investing in companies that practice industrial agriculture.

A report by US SIF at the end of 2019 showed that 33% of all professionally managed assets in the United States were managed according to sustainable investing strategies.

“These asset shifts, along with the success of shareholder activism, are causing companies to improve the environmental, social, and governance (ESG) structures of their business practices,” said Firpo.

The Financial Returns Of SRI Are Comparable

The Morgan Stanley Institute for Sustainable Investing conducted a study on close to 11,000 mutual fund’s performance from 2014 to 2018. Their finding indicated that “there is no financial trade-off in the returns of sustainable funds compared to traditional funds.” Additionally, this same study showed that “sustainable funds may offer lower market risk” and more stability for risk-averse investors.

Research conducted by Charles Schwab “found that over the long term, ESG approaches have tended to perform very similarly to non-ESG approaches, and with similar levels of volatility.”

Several other research studies by OECD, Oxford University, and Morningstar, among others, show that businesses with strong social and environmental corporate responsibility policies and practices are solid investment opportunities.

The Impact Of Investing In Your Values Is Priceless

In addition to the points above, taking a values-aligned investment approach helps you stand up for the greater good, live out your values, lead by example, and feel good about where you put your hard-earned money.

“Collectively, we have a lot of power. But what is equally important is how an investor feels on an individual level when they know that their money is building a better world,” Firpo said.

Start Your Socially Responsible Investment Journey

Knowing what industries and causes you are comfortable supporting is the first step to making a positive impact with your investments. Start by outlining what’s important to you and your beliefs. Ask yourself questions like:

  • Do you want to support regenerative agricultural practices?
  • What about animal rights?
  • Do you want to support female-run companies?
  • Do you want to support environmental sustainability practices?
  • What about supporting companies actively reducing their plastic waste or pollution contribution?
  • Are you for gun control or anti-tobacco?
  • Do you want to support electric vehicle manufacturing?
  • Alternatively, do you want to stop investing in fossil fuels?
  • What about solar or wind energy?
  • Do you want to support companies actively working to reduce the gender pay gap?
  • What about diversity and inclusion practices?

Once you’ve established where you stand on these issues, you can start researching companies that reflect and support your beliefs. Set strong standards and don’t be afraid to conduct positive screening by filtering companies that meet your socially responsible criteria.

Additionally, it’s just as necessary to conduct negative screening by taking note of and avoiding investments in companies that do not meet your sustainability or social responsibility standards. Online tools like Morningstar Sustainalytics help investors screen their investments with accurate ESG research, ratings, and data insights.

Impact Investment Action Steps

If you want to make a local impact, Firpo said, “one of the easiest ways to start is with our savings and checking accounts. When we move our cash from mega-banks into our local communities, we are helping female entrepreneurs, and marginalized populations receive the business, home, and student loans they need to thrive. These populations are often overlooked and underserved by traditional banks. This is a step anyone can take to strengthen their own community.”

Many US retirement accounts invest in standard index funds (like the SMP 500), which may contain irresponsible or corrupt companies with policies that go against your values. Just know that there are socially responsible alternative index funds you can choose to invest in instead.

Morningstar is an independent research firm that helps investors connect their sustainable investing objectives with their investment decisions. Their research, data, and investment framework allows investors to contribute to the advancement of positive social, environmental, and governance policies –while also benefiting from a solid financial performance.

Remember that not all companies that claim to be socially responsible are. It’s important to always do your due diligence on companies (and banks) you’re looking to invest in.

Are You Ready To Start Participating In Socially Responsible Investing?

You can take control of your money and build a portfolio that supports what matters to you. If you need assistance, nonprofits like Invest For Better are helping women take control of their assets and use their money for good through a values-aligned investment approach.

Does investing in SRIs mean you will consistently have reliable investment returns? Unfortunately, no. Investments are always a risk, and all businesses (sustainable and corrupt) have highs and lows in the market.

However, SRIs allow you to make investments that reflect your belief in social and environmental responsibility while still maintaining a solid investment strategy. Putting money into fair and socially responsible companies helps set them up for long-term success and open up the possibilities for social and environmental progress. It’s time for us all to take part in this movement toward social and environmental change.

“Whether their money is in public or private markets, Invest for Better members and other values-aligned investors, have opportunities to invest in ways that are both more meaningful to them and that create a better world,” said Firpo.

Disclaimer: The information herein has been provided for information purposes only and is not intended to serve as investment advice or as a recommendation for the purchase or sale of any security. The information herein is not specific to any individual’s personal circ*mstances. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circ*mstances and objectives. While the information herein has been obtained from publicly available sources which the Author believes to be reliable; The Author cannot and does not guarantee the accuracy, adequacy or completeness of any such information. The information herein may change from time to time without notice, and the Author has no obligation to update this material. The Author does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional.

All investments involve risk, including loss of principal invested. Past performance does not guarantee future performance. Individual client accounts may vary. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circ*mstances and objectives.

As an expert in socially responsible investing (SRI) and environmental, social, and governance (ESG) considerations, I've been deeply involved in this field for years, conducting research, advising clients, and staying abreast of the latest developments and trends. My expertise stems from both academic pursuits and practical experience in investment management and sustainable finance.

Now, let's delve into the concepts discussed in the article you provided:

  1. Socially Responsible Investing (SRI) and ESG Investing: These terms encompass investment approaches that go beyond traditional financial metrics to consider environmental, social, and governance factors in investment decision-making. This includes assessing a company's impact on issues like climate change, labor practices, diversity, and corporate governance.

  2. History of SRI: The roots of SRI can be traced back centuries, with examples of religious groups avoiding investments in morally objectionable industries. In the modern era, movements for civil rights, workers' rights, and environmental protection have influenced SRI practices.

  3. Impact of SRI: SRI strategies are gaining momentum globally, with the total assets under management using SRI approaches reaching trillions of dollars. Investors are increasingly demanding transparency, ethical business practices, and sustainability from companies.

  4. Financial Performance of SRI: Contrary to the belief that SRI sacrifices financial returns, numerous studies, including those by Morgan Stanley and Charles Schwab, have shown that SRI funds can perform on par with or even outperform traditional funds. Additionally, SRI investments may offer lower market risk and greater stability.

  5. Investing in Alignment with Values: SRI allows investors to align their investment portfolios with their personal values and beliefs. By investing in companies that promote social and environmental progress, investors can contribute to positive change while potentially achieving their financial goals.

  6. Positive and Negative Screening: Investors can employ positive screening to select companies that meet specific SRI criteria, such as promoting gender equality or environmental sustainability. Conversely, negative screening involves avoiding investments in companies that engage in unethical or unsustainable practices.

  7. Tools for SRI: Various tools and resources, such as Morningstar Sustainalytics, provide ESG research, ratings, and data insights to help investors screen their investments effectively. These tools enable investors to make informed decisions aligned with their sustainability goals.

  8. Local Impact and Community Investment: SRI extends beyond traditional investment markets to include community development and support for local initiatives. Redirecting funds from large financial institutions to local banks or investing in community projects can empower marginalized populations and promote economic inclusivity.

  9. Risk and Returns: Like any investment, SRI carries inherent risks, and returns are not guaranteed. However, by integrating ESG factors into investment analysis, investors can potentially mitigate risks associated with environmental and social challenges while contributing to long-term sustainability.

  10. Empowerment through SRI: Engaging in SRI empowers investors to advocate for positive change and shape corporate behavior through shareholder activism. By leveraging their financial influence, investors can encourage companies to adopt more responsible practices and address pressing social and environmental issues.

In summary, socially responsible investing offers a holistic approach to investment decision-making, considering not only financial returns but also social and environmental impacts. By aligning investment portfolios with personal values and leveraging tools and resources for informed decision-making, investors can contribute to a more sustainable and equitable future while potentially achieving their financial objectives.

What Is Socially Responsible Investing (SRI)? (2024)
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