A growing number of investors want their investments to align with their beliefs, but making that happen isn’t always as easy as they might hope.
Whether you call it socially responsible investing (SRI), impact investing, values investing, or environmental, social and corporate governance (ESG), it’s all about investing in companies that embrace causes you support, or avoiding companies that profit from practices you don’t like.
Asset managers and institutions invested $8.72 trillion based on SRI principles in 2016, up 33% from 2014, according to the US SIF Foundation, the nonprofit arm of the Forum for Sustainable and Responsible Investment, an industry group that advocates for sustainable investing.
The good news:
- There are more SRI choices for investors — about 1,000 mutual funds and other investment vehicles in 2016, up from 894 in 2014, the foundation says. And some investment apps, such as Stash and Motif, are in on the trend.
- You can build a diversified portfolio because there are SRI funds across asset classes.
- Some studies confirm that impact investing can offer returns comparable to non-SRI offerings. For example, the average annual performance over 10 years for five SRI indexes ranged from 5.96% to 7.39%, vs. 6.92% for the benchmark Standard & Poor’s 500 index, according to investment manager Nuveen.
The bad news? There are hurdles to SRI.
1. Your SRI fund’s investments may surprise you
Your ideas about social responsibility may not jibe with the manager who picks the fund’s investments.
Take for example, Wells Fargo, which was penalized after its employees created scam accounts in customers’ names. Yet, the bank is included in some SRI mutual funds.
That surprised Nancy L. Skeans, the CEO of Schneider Downs Wealth Management Advisors, who asked two fund managers about it. They told her Wells Fargo does a lot of charitable work. “Therefore, they end up in the portfolio,” she says, referring to the bank.
No fund will satisfy all investors. “There’s no perfect company out there,” says Jon Hale, director of sustainable investing research at fund tracker Morningstar.
2. Your portfolio may be less diversified than you think
If you invest in SRI mutual funds and non-SRI funds in the same sector, your portfolio’s diversification may take a hit. Learn how diversification reduces your investing risk.
For example, an SRI fund with large-cap stocks may mimic a regular large-cap stock fund, meaning your portfolio gets knocked when that sector slumps.
3. Your 401(k) probably doesn’t offer SRI funds
Less than 1% of 401(k) plans offers an SRI fund, according to Brooks Herman, vice president of data and research at Brightscope, which tracks 401(k) plans. For many employers, the SRI trend is too new, while some of those funds are expensive and lack a clear measurement benchmark, he says.
Still, investors have options:
Some funds invest sustainably without the SRI label. Enter the ticker symbols of your 401(k)’s mutual funds at Morningstar.com and scroll down to find the sustainability rating. Then you can choose funds that incorporate SRI.
Lobby your plan administrator. “That often gets the ball rolling towards adding ESG options,” Hale says.
If your plan offers a brokerage window — or access to its full product suite rather than just your plan’s investment lineup — use that to invest in SRI funds.
Do your impact investing via an individual retirement account or brokerage account.
4. You may pay higher fees
Fees represent a big risk to investing success, and some SRI funds charge 2% or more — much higher than the 0.75% average expense for actively managed funds cited by Morningstar.
But there are low-cost SRI investments available. For example, Vanguard Group’s Social Index Fund has a fee of 0.22%. And on average, SRI funds “tend to be a bit more expensive than other funds, but the differences are not large,” according to Morningstar.
Doing the right thing isn’t always easy, but with a little bit of work, even your investments can add value to your beliefs — and bottom line.
Learn more about SRI
- The best brokers for SRI investing
- How to invest without sacrificing your values
- How to invest your money