Why Is Socially Responsible Investing Important?

We all want to make more money, and investing is a great way to gradually build wealth over long periods. But when most people think of investing, they probably think of investing in companies that, to put it mildly, compromise the greater good of our planet and society.

But that looks like it’s all changing. That doesn’t mean investing must come at the cost of being socially responsible. In comes the idea of socially responsible investing, a new concept that allows investors to benefit financially while simultaneously helping the planet.

Recently, surveys indicate that more and more investors are becoming interested in sustainable investing.

According to a Morgan Stanley survey, interest in sustainable investing increased 10% between 2017 to 2019, with the total percentage of individuals interested in SRI’s at 85%. Additionally, Morningstar reported over 300 sustainable open-ended mutual funds and exchange-traded funds in 2019.

If this sounds like something you’re interested in, keep reading more about what socially responsible investing looks like, why socially responsible investing is important, and how you can jump into becoming this type of investor today.

What Exactly Is Socially Responsible Investing?

Let’s face it: a lot is happening in our world right now. From the looming threat of climate change to the growing homeless crisis in the United States, there’s a lot wrong with modern society.

As we move into 2022, it seems like there are a lot of causes that demand our attention. From AI to a global reckoning for better treatment for POC and minorities to the worsening climate crisis at times. And, as individuals, it’s easy to feel hopeless and overwhelmed.

As a result, younger generations are becoming much more involved in improving the world’s social and environmental conditions.

Also known as socially responsible investing, sustainable investing, responsible investing, or impact investing, socially responsible investing involves investors making ethical investments.

Instead of fueling companies like Chevron or Exxon Mobile, who are pumping our Earth full of toxic sludge and fueling the ever-worsening climate disaster, you can instead invest in companies that make our world a better place.

Instead, investors can use socially responsible investing (SRI) to invest in companies that match their firm environmental, social, and governance conduct.

By investing in companies that create a more positive, healthier world, investors can receive money from traditional investment opportunities and feel better about themselves, helping make the world a better place.

ESG Factors

At the heart of this idea of socially responsible investing is another term: ESG factors. These are the markings that indicate whether a company presents a socially responsible investment opportunity or is using buzzwords to reel you (and your money) in.

ESG stands for environmental, social, and governance and is a lens through which you can view and determine the responsibility of companies and their opportunities.

The idea is to invest only in companies that match your definition of social responsibility rather than in companies that contradict your beliefs.

Environmental factors allow investors to consider a company’s performance through an environmental lens. For example, investors who plan to invest socially responsibly will consider a company’s carbon emissions if it has high pollution, how efficient it is if it contributes to greenhouse gas emissions, and so forth.

Investors will likely avoid companies with poor environmental performance and instead invest in companies with positive environmental impacts.

The social factors consider how well a company performs with its employees and communities. For example, how does the company impact human rights, have a diverse collection of workers and board members, have a history of discrimination, how well they protect data privacy, and so forth?

Finally, the governance lens means that investors prioritize how well the company leads, executive pay, audits and internal controls, and shareholder rights.

Furthermore, investors will also examine the diversification of the Board of Directors and whether the company makes any political contributions (and if so, to which politicians). Basically, this explores how ethical the company is and whether it makes any donations to any unethical endeavors.

It’s important to note that investing in companies is separate from donating to companies in the act of charity or philanthropy. You simply choose companies to invest in based on how they impact the world, and you use ESG factors to determine how they operate and work.

Does Socially Responsible Investing Make As Much Money?

Many think that socially responsible investing compromises the amount of money you will see on the return. Luckily for us (and our wallet), this is a misconception. On the contrary, socially responsible investments can make as much or even more than traditional investments.

Now, there is more opportunity than ever to invest in socially responsible companies. Morningstar reports more than 150 mutual funds and 45 ETFs with an SRI mandate.

Researchers found that investments typically meet or even exceed the performance of comparable traditional investments. Researchers reached this conclusion after examining data performances of over 10,000 open-end mutual funds.

Not only that, but most societies are opening their eyes to more ethically positive ventures. Perhaps it is because of the Paris Agreement or because we care more about humanitarian disasters.

Regardless, the world is moving towards socially responsible ideas and practices, which means that the ethical companies you invest in will only grow financially.

This shows that just because you are investing in companies that align with your beliefs doesn’t mean you must compromise the amount of money you should expect to see in return.

Why SRI Varies So Greatly

An SRI will look different from person to person. The key to an SRI is to define what social factors matter most to the individual investor. Each person has a different idea of what makes our world a better place, so the idea of an SRI varies from person to person.

For example, if you are passionate about the environment, you should seek out investment opportunities from companies looking at green energy sources (like wind or solar companies). You can also look for companies that don’t directly prioritize the environment but remain carbon-neutral and have clean energy practices.

Additionally, socially responsible investments are as much about the companies you don’t choose to invest in as much as the companies that you do invest in. Keeping the same example of prioritizing the environment means that you would steer clear of companies that negatively affect the environment.

Why Socially Responsible Investing Is Important

Socially responsible investing is essential on multiple levels. It helps the planet move in a more positive direction, but SRI can also positively impact individual investors’ lives.

As it turns out, supporting causes investors to deem important can rewire brain functions to elicit essential brain chemicals like dopamine while decreasing overall mortality rates. Learn why socially responsible investing is important for investors, the planet, and society.

For Investors

If you’ve ever walked past a homeless person and given them your last dollar, you may have noticed that you’ve felt happy afterward. At this moment, you’re experiencing what researchers call a “giving glow.”

This glow is the feeling of immense inner happiness due to giving back to your community, those in need, or a cause you believe in.

It’s not just mumbo-jumbo – studies prove that your mental state improves when you put money into things you believe in.

Countless studies prove there is a relationship between giving to causes you believe in and a release of essential “happy” chemicals in your brain, including dopamine and endorphins that release endorphins that give people feelings of euphoria and Oxycontin.

One such study from the U.S. News and World Report claims that acts of philanthropy and charitable giving trigger the release of these chemicals in our brains and make us feel peaceful, happy, and fulfilled.

Interestingly, there are more links between giving to causes we believe are essential and lowering mortality rates. A few years ago, a study tracked 2,000 California residents and found that volunteerism reduced their mortality rates by a shocking 63 percent.

Why does this happen? According to research from Jorge Moll from the D’Or Institute for Research and Education in Brazil, donating to charity can trigger chemical reactions within our brains.

Moll reports that charitable donations activate what is called our mesolimbic system. As a result, helping causes that we believe in and find meaningful triggers our reward system in our brains.

So, the next time you wonder what good it will do to financially invest in companies that align with your beliefs, it turns out that it will do you quite a bit of good.

When you champion companies that align with your own beliefs and make investments to help these companies grow, not only can your wallet grow, but it can also make your brain feel good.

For The Planet

It doesn’t take a degree in earth sciences to realize that we’re at a crossroads with the climate disaster. If countries don’t take significant steps to curb emissions, the chances of avoiding a climate disaster in the next 100 years are slim to none.

It can feel overwhelming and impossible to make a change individually. After all, most climate emissions result from powerful companies that don’t seem to want to change.

So, what can you do? Invest in companies that prioritize clean energy, carbon-neutral practices, and environmental positivity. By investing in these types of companies, you not only give them a leg up but also take resources away from the companies that practice bad environmental practices.

At their core, companies and businesses prioritize money. That’s what gets us into these problems. To begin with, environmental practices often cost much more. But suppose companies see that they are losing investors to their competition, who prioritize clean environmental practices.

This will increase the incentive to change their practices to get more backing from potential investors.

Supporting companies that positively impact the environment will gradually help our planet turn away from our impending climate disaster.

For Society

You’re also avoiding companies that negatively affect society, so avoid investing in companies involved in gambling, tobacco, alcohol, weapons, firearms, and more.

When you back companies that promote humanity’s pursuit of a more just, equal, and healthier society, you can help improve the daily lives of individuals in your community.

For example, suppose you are passionate about eliminating racial bias and prejudice. In that case, you can invest in companies that employ POC and minorities or in companies that do inner-city outreach.

At the bare minimum, you can actively avoid investing in companies with a history of employing prejudiced CEOs or hiring CEOs that counteract your beliefs.

How To Ethically Invest

Companies don’t make it easy to find out which ones are doing well and which ones are, well, saying they’re doing well but really doing bad things behind closed doors.

As an investor, it can be frustrating to put your faith in a company only to find out months later that they’re secretly dumping large donations to political campaigns you don’t support or have a history of treating their employees poorly.

When you design your socially responsible investing strategy (otherwise known as SRI), you will need to consider various ESG factors to find the best investment opportunities.

Once you handle traditional investing, building your socially responsible investment portfolio isn’t much more complicated. It all comes down to researching the types of companies you want to help succeed and grow and then understanding which will provide a better return on your investment.

Of course, you may want to speak with an experienced financial advisor before putting down any sizable investments. Also, always make sure to never put more money down than you are comfortable losing.

While there are low-risk investments, make sure to know that you may not see this money back for quite some time, so it’s always a good idea to never use the money on investments you need for rent, food, etc.

Regardless, here are the steps below to build your portfolio.

Prioritize Your Passions

The first step is to understand what causes matter to you. As mentioned above, SRI’s vary significantly from person to person because each individual has a different idea of what will improve our planet, society, and experience for our fellow human beings.

Before you invest, outline what is important to you. Decide ahead of time if you have any deal-breakers and what areas you want to focus on so that you go into the market with a clear outline of what you are looking for and trying to avoid.

Do you feel passionate about supporting the LGBTQ community? Or perhaps you want to focus on making inner cities more green by planting tiny forests around urban areas. Whatever causes you’re into, understand what areas you’re drawn to first (and what areas you want to steer clear from) before conducting market research.

Research, Research, Research

Once you have your starting point, you can begin researching companies to find some that align with your beliefs. A great tool for conducting your research is Morningstar, an independent investment research firm.

What does this mean? They research and vet various investment opportunities with a team of proven Premium ratings and valuations from Morningstar’s 150+ analyst-strong team.

Morningstar even has its category of sustainable investing to help guide you through the market so that you can make the best investment for yourself.

Lastly, it’s always a good idea to see if the company provides a sustainability report that you can read online. This way, you can see if they are sustainable or not.

Additionally, you can snoop on companies like Glassdoor to see how employees rate work culture and their treatment. Finally, try looking at their board of directors to see if their board is diverse or not.

Decide Between Stocks and Funds

Before investing in a company, you must decide if you want to purchase stocks or funds. While stocks are an essential feature in your investment portfolio, experts say that stocks should not encompass more than 10% of your portfolio. As a result, you must choose wisely.

Now more than ever, there are plenty of sustainable mutual funds to diversify your portfolio, but make sure that you properly research the funds before you purchase to ensure that the funds align with your SRI goals.

Ask For Help

We get it; navigating potential investment opportunities is overwhelming enough, never mind trying to track down companies that align with your beliefs. If you find yourself stumped on which investment opportunities to pursue, you may want to ask for help from a financial adviser.

There are plenty of individual financial planners and advisers with whom to collaborate. You can also use different sites like Morningstar or other investment companies. Using a fund manager, you can ask your fund manager to select assets that adhere to your specific SRI criteria.

Most managers and brokers use screening tools to sift through various options to find investment opportunities matching your SRI goals and criteria.

Finally, you may want to use the help of a robo-advisor. A robo-advisor is a program that uses algorithms to help investors create and maintain an investment portfolio. Robo-advisors use their personal investment goals and risk tolerance to choose which stocks and funds they should invest in.

Many people are starting to use robo-advisors because they’re inexpensive and sift through work hours on your behalf. However, they do have limitations of their own. For example, robo-advisors don’t let you add specific investments when they are searching for opportunities, so you will still have to do some research on your own.

If this is something that interests you, make sure to conduct thorough research before purchasing any stocks or funds. Many companies like to tout that they are on the up-and-up, only to hide their dirty laundry behind closed doors. If you feel overwhelmed, hire a financial advisor or use a robo-advisor to help vet your leads.

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