Socially responsible investing (SRI, and its counterpart impact investing) means putting your money into companies that match your mores, values and causes while taking into account environmental, social and corporate governance (ESG) criteria. ("Impact" investing looks to invest in companies have a purely positive social impact.) As the increasingly popular saving goes, you try to make your investments do good in addition to do well.
According to the latest U.S. Sustainable, Responsible and Impact Investing Trendsreport from U.S. SIF: The Forum for Sustainable and Responsible Investment, the total U.S.-domiciled assets under management using SRI strategies expanded from $3.74 trillion at the start of 2012 to $6.57 trillion at the start of 2014.
And the 2016 U.S. Trust Insights on Wealth and Worth survey reports that giving back is growing in importance among investors, especially rich ones. Among the findings:
- Of those who own or are interested in owning impact investments, more than half do so, because it's the right thing to do or because they feel it's the responsibility of American corporations to act in a socially and environmentally responsible manner.
- Four in ten believe that companies with good social and environmental practices are less susceptible to business risks; nearly the same number believe these good corporate citizens deliver superior financial performance.
- Environmental protection and sustainability tops the list of issues that matter most to high-net-worth investors, followed closely by health care and disease prevention and treatment. Also of high importance: access to education and support for vulnerable members of society such as veterans, children and elders.
You can make SRI investments in individual companies or through mutual funds or exchange-traded funds. Most funds have money in a lot of companies, though, and many companies have broad - sometimes hidden - operations and interest. How can you avoid becoming like the environmentalist who unwittingly puts money into an oil conglomerate or the recovering alcoholic who winds up helping fund a brewing company?
"SRI is a very broad designation," says Martha Post, a principal and chief operating officer with Hewins Financial Advisors in San Mateo, Calif. "A number of data providers offer information on individual companies, mostly in the form of scoring systems based on ESG factors."
(The AFL-CIO and U.S. SIF are among nine groups that plan to soon urge the U.S. Securities and Exchange Commission to strengthen corporate disclosure requirements.)
Some investors cling to the belief that SRI investments necessarily perform worse than non-SRI investments.
"Depends on what studies you read," Post says, "although it no longer seems to be the case that investing with SRI concerns in mind automatically consigns investors to sub-par returns. We believe clients can add an SRI focus to portfolios without sacrificing ... investing in low-cost, globally diversified portfolios with an emphasis on small-cap and value stocks."
A portfolio of individual stocks and bonds gives you the greatest flexibility to control what companies you own parts of, Post says. "We work with one manager who provides highly customized equity portfolios reflecting a client's specific concerns, with the ability to do everything from excluding particular companies to overweighting companies with strong ESG scores," Post says. "There are also very good mutual funds that provide diversified global equity exposure focused on sustainability or religious values and can meet the needs of many clients."
U.S. SIF reported that 925 investment funds incorporated ESG factors in 2014, in addition to hundreds of alternative investment vehicles, community investing institutions and other vehicles. One of the consistently better-performing benchmarked against the S&P 500: the MSCI KLD 400 Social Index of U.S. securities of companies with "outstanding" ESG ratings, which is up almost 8% so far this year. Other such funds include Calvert Equity (CSIEX) and Eventide Gilead (ETGLX).
According to U.S. Trust, the first step in aligning investments with beliefs is to your pinpoint top motivations and interests. Ask yourself:
- Where is my passion? Which global or local challenges motivate me?
- How might global economic trends be affecting these challenges? What role can my investments play in contributing to solutions?
- What are my investment objectives? Am I satisfied by financial returns or am I also driven to affect issues I am passionate about through investment?
"Check to see if the fund's mandate has SRI or other value or beliefs restrictions on its investments," advises Walid Petiri, chief strategist at Financial Management Strategies in Baltimore.