Socially Conscious Investing
Climate change is slapping the western US in the face right now, so it’s on many people’s minds. Most people are curious to know what they can do to help. Socially conscious investing provides one path forward.
Broadly speaking, socially conscious investing involves going beyond profitability when making investments. It considers the impact that investing in a company or industry can have on the community and the world at large.
Now, I realize that many readers do not consider themselves investors. And although you may not be a professional investor, if you’re saving for retirement in a 401(k), IRA, or Roth IRA, you are indeed an investor. Inside all those mutual funds and ETFs are stocks and bonds that represent ownership in companies.
Over the last decade, we’ve seen financial institutions slowly recognize that investors care deeply about companies’ social or environmental dimensions. Many now offer ways to get involved in socially conscious investing.
Coming to Terms
Socially conscious investing spans a lot of ground, but there are a few essential terms to know.
ESG: Environment, Social, and Governance
Many investors believe that a company needs to do more than generate a profit. ESG is a framework for evaluating companies along those other axes. It can cover many dimensions of the business. environmental impact how the company treats their employees the communities they affect compensation for company leadership the company’s internal controls/self-monitoring Research analysts integrate these various dimensions and come up with an ESG score.
ESG is a rubric or framework and often provides the foundation for socially responsible investing (SRI). Typically, the higher the score, the better the company is doing in these areas.
SRI: Socially Responsible Investing
SRI involves actively adding or removing specific companies or industries from your investment portfolio due to ethical concerns. For example, many people want to avoid investing in alcohol, tobacco, or gambling, so they avoid investing in companies that make their profit in those areas.
SRI can be considered the outcome of an ESG evaluation. It is the implementation of the guidance provided by ESG.
Impact Investing:
Impact investing is the other side of the coin from SRI. Whereas SRI typically involves avoiding certain investments, impact investing encourages people to invest in companies aimed at making the world a better place.
How to make Socially Responsible Investments
If socially conscious investing sounds appealing, then how do you go about implementing your investment philosophy?
DIY
You can research the companies you are interested in to see if they fit your ethical standard. Companies make this information freely available. Moreover, many brokerage firms (like Fidelity and Charles Schwab) offer stock screening tools to help you with this process.
Find a Product Already on the Market
Hand-selecting stocks can become onerous. As an easy alternative, you can pick a mutual fund or ETF whose focus aligns with your values.
These days there are plenty of mutual funds and ETFs oriented toward socially conscious investing. They can be found among most asset classes (domestic stocks, international stocks, bonds, etc.).
Hire a Planner
If you want to have someone do all this work for you, you can hire a financial advisor. I help guide clients toward products tailored to their values. It takes some work, but people are happy to have an investment portfolio that matches their ethical beliefs.
If your planner does not offer this service, then check out a robo-advisor. Robo-advisors, such as Betterment, automate the process of generating investment portfolios. Their software allows you to zero in on topics like climate change or social progress.
Setting Expectations
As the saying goes, there’s no such thing as a free lunch.
If you pursue a socially conscious investing approach, be aware that you’ll pay a premium. Financial analysts have to do extra work to determine ESG scores for any company that might make it into the fund. That means you will pay higher management fees for socially responsible mutual funds or ETFs.
Secondly, always consider the performance of your investments. It used to be that socially conscious investments underperformed the overall market. The good news is that this is no longer the case. Many keep pace with the performance of their investment class.
The bad news is that many still don’t perform as well as other funds. So please be careful when picking funds for your account.
Caveat Emptor
I wish I could say that pursuing socially conscious investing is straightforward, but it can be a rabbit hole. You will find that there are a lot of points that you’ll want to consider.
Be aware that large corporations will always have a simple path to stymie the best efforts of ethical investors. It’s not hard to add internal controls without enforcing them. Or to place token women or minorities on a board without giving them a voice to improve the direction of the company.
These stunts would earn the company a higher ESG score without actually making any genuine improvements. So you’ve got to be careful about how much you trust an ESG score.
Socially conscious investing also raises questions about the hierarchy of ethical concerns. Would you prefer to invest in an environmentally conscious company exclusively run by white males or an environmentally disastrous company with a mixture of genders and races?
These are questions many people weren’t considering when they were signing up for their company’s 401(k).
Keeping Clean
Socially conscious investing is important. I’m happy that financial institutions are finally allowing everyday investors to align their investments with their values.
The approach has some pitfalls, but socially responsible investing pushes our world in the right direction. It takes some research and some consideration, but it is worth it.
