Investors who want to align their money with their values have historically had few choices, most of them poor. That’s changing with the rise of socially responsible investing.
Once considered a fairly radical strategy, SRI — also called values-based investing or sustainable investing — has increasingly gained in popularity over the last several years. This type of investing grew 33% between 2014 and 2016, according to a recent Morgan Stanley report.
Understanding socially responsible investing
Socially responsible investing is as much about the investments you don’t choose as it is the ones you do: Companies that generate revenue from controversial industries like weapons, fossil fuels, gambling or alcohol are often excluded. Companies that promote social good, by way of practices like fair pay or a commitment to environmental sustainability, may be included.
That means investors interested in SRI select investments not just by the typical metrics — performance, expenses and the like — but also by whether a company’s revenue sources and business practices align with their values.
How to build a socially responsible investment portfolio
You could do the work to select individual stocks of companies with business practices you support, but it would be just that: work. These days, there are mutual funds, index funds and exchange-traded funds that have already done that sort of due diligence for you.
» Get more info: Our guide to mutual funds
Like other mutual funds, SRI funds allow you to buy small pieces of many investments in a single transaction. In this case, those investments are in companies that meet the fund’s criteria, which can vary widely. If you’re truly committed to supporting certain business practices and not capitalizing on others, you’ll want to dig into the fund’s holdings, which can be found in the fund prospectus.
You’ll also want to pay attention to the fund expense ratios, which are listed in the prospectus. Expense ratios are often, but not always, slightly higher for SRI funds, according to a Morningstar comparison of fund expenses from March 2017.
As always, diversification and asset allocation are key. You should approach building an SRI portfolio as you would any other portfolio, by allocating the money you have to invest across the appropriate asset classes — namely stocks or bonds — and then selecting investments in each asset class to diversify by geographic location, company size and industry.
» Need the basics? Here’s what diversification is and why it matters
Where to buy SRI funds
SRI funds can be found through many online brokers these days, but we’ve simplified things by reviewing the options and compiling our picks for the best brokers for socially responsible investing.
You’ll note the list includes some big-name brokerages, like E-Trade. But don’t overlook newer investment services: The robo-advisor Betterment now offers a diversified SRI portfolio option, and Motif Investing — which allows investors to buy up to 30 ETFs or stocks in one transaction — maintains a focus on values-oriented investments.
Socially responsible investment performance
Finally, the big question: Does a do-good investment strategy perform as well as the standard? There have been doubts about this approach, with opponents arguing that narrowing the field of investment options also leads to a narrowing of investment returns — in other words, following your heart comes at a cost.
But recent analysis, including this report from Nuveen, a division of financial services company TIAA, suggests that SRI indexes can offer similar returns to broad market benchmarks like the Standard & Poor’s 500 index, without additional risk. Another look at these funds from Charles Schwab shows that over both the long and short term, they’ve proved to be competitive with non-SRI funds — even beating them in some cases.
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