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What Is Socially Responsible Investing, or SRI?

Becoming a socially responsible investor isn't difficult — and can be even more lucrative than traditional investing.
June 25, 2020
Investing, Investing Strategy, Investments
What Is Socially Responsible Investing?
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Picking up litter, volunteering at a hospital, donating to racial justice organizations, investing — which of these is not like the others? When it comes to making the world a better place, investing isn’t the first thing that comes to mind. But socially responsible investing, or SRI, is more attainable and profitable than ever.

Once considered a fairly radical strategy, SRI has increasingly gained in popularity. According to a 2019 Morgan Stanley survey, 85% of individual investors are interested in sustainable investing, up from 75% in 2017. The options available to those investors have also grown: Investment research company Morningstar says there were 303 sustainable open-ended mutual funds and exchange-traded funds in 2019, up from 111 in 2014.

Socially responsible investing, or SRI, definition

SRI is the practice of thoughtfully investing in assets that align with an individual or group’s moral compass. The main idea behind SRI is that invested money can do more than generate returns for an investor: It can also create a positive impact in the world.

SRI tends to go by many names, including values-based investing, sustainable investing and ethical investing. The abbreviation “SRI” has also come to stand for sustainable, responsible and impact investing. Some SRI practices use a framework of environmental, social and governance factors to guide their investing. This is generally referred to as ESG investing.

Understanding socially responsible investing

Investors interested in SRI don’t just select investments 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. And since everyone has different values, how investors define SRI will vary from person to person.

If you’re passionate about the environment, your portfolio will likely have investments in green energy sources such as wind and solar companies. If you care about supporting the advancement of women, people of color and other marginalized groups, you may have some mutual funds that invest in women-run companies or hold stock in Black-owned businesses. And since socially responsible investing is as much about the investments you don’t choose as the ones you do, you may choose to divest from a company if you learn that it mistreats LGBTQ employees.

Since everyone has different values, how investors define SRI will vary from person to person.

You may find that some SRI funds match your values while others do not — and you may be surprised at what companies end up in an SRI fund. For example, Vanguard’s VFTSX fund is screened for certain ESG criteria and excludes stocks of certain companies in industries such as fossil fuels and nuclear power. But the fund’s holdings include Amazon and Facebook — two companies some SRI investors have opted not to support.

In the past, SRI funds have been tied to higher fees than their traditional counterparts, but according to 2019 Morningstar data, of more than 40 diversified ETFs that follow ESG criteria, 13 charge expense ratios between 0.09% and 0.2% per year, which is quite low.

And while you certainly can find more expensive SRI funds, you can also find fairly inexpensive ones. For example, the Fidelity U.S. Sustainability Index Fund (FITLX) has an expense ratio of 0.11% and an above-average portfolio sustainability score of 50. According to Morningstar, the average asset-weighted expense ratio across all passive funds was 0.13% at the end of 2019, higher than Fidelity’s sustainable fund.

» Need more info? Learn about a typical mutual fund expense ratio

Socially responsible investment performance

Does a do-good investment strategy perform as well as the standard? The short answer is yes. A 2020 research analysis from asset-management firm Arabesque Partners found that 80% of the reviewed studies demonstrated that sustainability practices have a positive influence on investment performance.

Several other studies have shown that SRI mutual funds can not only match traditional mutual funds in performance, but they can sometimes perform better. There is also evidence that SRI funds may be less volatile than traditional funds.

In the past, there have been doubts about SRI, with opponents arguing that narrowing the field of investment options also leads to a narrowing of investment returns. Now, there is a growing pool of evidence that shows the opposite: SRI isn’t just good for your heart, it’s good for your portfolio, too.

How to get started with SRI and ethical investing

There are several ways to become an SRI investor — some people choose to take a DIY approach, while others may opt to get help building their portfolio from a robo-advisor.

1. DIY SRI. If you want maximum assurance that the companies you’re investing in support your personal definition of SRI, you may want to create your own SRI portfolio out of individual stocks. You’ll need to do the work to select companies with business practices you support, and it is just that: work. Researching how a company adheres to ESG criteria takes a lot of time and effort, but it may be worth it to you.

» Want to know more? Learn how to research stocks

If you’re not keen on picking and choosing individual stocks, you can still get pretty hands-on with mutual funds, index funds or exchange-traded funds. These funds have done a lot of the due diligence for you — they include selected assets that adhere to criteria laid out by the fund manager. Just remember that when working with SRI funds, you do give up a bit of control over your portfolio, and you may want to look through a fund’s complete list of holdings before investing in it.

If you want to create your own SRI portfolio — whether with individual stocks or funds — you’ll need a brokerage account. Learn more about how to open a brokerage account.

2. Robo-advisors. The majority of people prefer to make socially responsible investments when possible — but it’s a lot of work to figure out how committed a company really is to ethical practices. This is where robo-advisors come in. Robo-advisors use algorithms to build and maintain an investment portfolio based on your risk tolerance and goals. Here are some of our top picks for robo-advisors that offer an SRI investment portfolio option:

Advisor
Management fee
Promotion
Learn more


0% per year

Why we like it: SoFi will build a portfolio around an impact area chosen by the investor.

Free career counseling plus loan discounts with qualifying deposit.


$0 account minimum
Betterment


0.25% per year

Why we like it: Investors can opt into an SRI portfolio.


Up to 1 year of free management with qualifying deposit


$0 account minimum

0.25% per year

Why we like it: Impact Portfolios invest in companies that advance women and and meet high ethical standards.


Up to $750 cash bonus with qualifying deposit


$0 account minimum

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