Socially Responsible Investing, also known as social investing, is an investment strategy which seeks companies that offer a financial return and promote environmental stewardship, consumer protection, human rights and racial or gender diversity.
There are other types of socially responsible funds. Environmental, social, and governance (ESG) funds, impact funds, green funds and faith-based funds.
Generally, ESG funds will seek to exclude securities of firms engaged in contentious activities relating to health care matters, alcohol and tobacco, gambling, adult entertainment, indiscriminate antipersonnel weapons, human and/or labor rights and oil production.
Impact funds have the same criteria as environmental social and governance funds, but the funds performance is given equal weight. Some of the industries included in this investment strategy would be healthcare, education, clean and renewable energy and agriculture.
Green funds only invest in companies that are deemed socially conscious in their business dealings or directly promote environmental responsibility. A green fund can come in the form of a focused investment vehicle for companies engaged in environmentally supportive businesses, such as alternative energy, green transport, water and waste management, and sustainable living.
Faith-based funds only investment in companies that operate based on the teaching of specific religious organizations. If you are seeking to follow the strictest interpretation of your particular affiliation’s mandates, the investment principals of religious organization are usually available with a quick internet search.
One example of socially responsible investing is community investing, which goes directly toward organizations that both have a track record of being socially responsible through helping the community, and have been unable to acquire funds from other sources such as banks and financial institutions.
The funds allow these organizations to provide services to their communities, such as affordable housing and loans. The goal is to improve the quality of the community by reducing its dependency on government assistance such as welfare, which in turn has a positive impact on the community’s economy.
Investors around the world are increasingly conscious of how business practices may impact the environment and, in turn, future generations.
As a result, many investors are interested in how to align their sustainability values with their investment goals. There are many sustainability investment strategies based on the idea that investors who wish to accomplish this dual objective should not have to forfeit sound underlying investment principles.
Investing based on your principals had in the past been difficult, and there was a misconception that investing in ESG funds would diminish portfolio returns. Over the years the number of mutual funds or ETFs has greatly increased, and the return on your investments has also increased.
Most investment management companies now offer socially aware portfolios that provide exposure to ESG investing through low cost, well diversified, exchange traded funds (ETF’s) that are designed to suite different risk tolerance levels and investing goals.
Now may be a good time to consider investing in portfolios such as these because many companies are providing more extensive data about their ESG practices, and ESG research and analysis methods have become far advanced.
With socially aware portfolios, you can invest in companies with stronger governance practices and implement strategies that may align with many of your values, while potentially generating returns that are competitive with non-ESG strategies.
Robin Bess is director of client services at Cambridge Financial Services.