The Basics of Socially Responsible and Impact Investing

Investors have a lot of options when it comes to where they want to put their money–– individual stocks, bonds, mutual funds, and ETF’s are all options traded on public markets. You can buy passive, active, or hybrid managed funds to help you reach financial goals. When determining which options to invest in, you might compare how they are managed, but beyond that, you should know how they are constructed and the ideologies behind them. 

With the rise of social consciousness, accessibility to information, and more companies and their investors modeling the importance of making social impact, individual investors are also demanding that they are able to align their values with their investments. This can be done through ESG (Environmental, Social, and Governance) or SRI (Socially Responsible Investments) strategies (strategy names are used interchangeably). 

Here’s a quick look at how a traditional investment strategy works, vs ESG/SRI investments.

Traditional Investing Strategy: Prioritizes financial returns/growth vs. how it can negatively impact our society. These strategies include most publicly traded companies regardless of their industry, effect on the environment, and negative social impact. This traditional strategy takes advantage of shady financial systems and amplifies inequitable power structures. This can cause extreme harm to communities that are unprotected. This strategy disregards social justice and environmental impact. This is typically a basic index fund or actively managed fund.

ESG/SRI: Considers social impact, encourages ethical practices, and products. ESG/SRI investing involves factoring issues such as carbon emissions, labor standards, community relations and board composition into your investment decision. Screeners analyze to determine how a company impacts the environment, how they treat customers/employees, social program support, and if the company exploits loops holes in legal guidelines. 

In a nutshell, ESG/SRI investing aims to reduce exposure to companies involved in unsustainable activities and environmental, social, or governmental controversies. They look to increase investments in companies that work to address solutions for core environmental and social challenges in measurable ways. 

Sounds like a win-win, so then why doesn’t everyone invest in ESG/SRI? You probably guessed it, not everyone believes in people over profit. Some ESG/SRIs can come at a premium because of associated management resources, and there’s a stigma of them not reaping the returns that traditional investment strategies do. That said, Betterment recently did a white paper comparing their SRI portfolio vs. their core portfolio. The evidence indicated that both historical and forward-looking performances are not significantly different, but there may be return differences over shorter time periods. With the right ESG/SRI investment strategy, you can potentially achieve market-like returns or better.

Feel free to contact me if you’re interested in learning about how we can align your values to your portfolio. 

Be safe,