Why Is Socially Responsible Investing Important? (2024)

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 that investing has to come at the cost of being a socially responsible individual. In comes the idea of socially responsible investing, a new concept that allows investors to benefit financially while helping the planet at the same time.

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 recently 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 is socially responsible investing 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 in 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 referred to as sustainable investing, responsible investing, or impact investing, socially responsible investing is the idea of 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, governance conduct.

By investing in companies that create a more positive, healthier world, investors can receive money from traditional investment opportunities and feel better than they are, 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 of how you can identify if a company presents a socially responsible investment opportunity or if they’re using buzz words to reel you (and your money) in.

ESG stands for environmental, social, and governance and is a lens for you to view and determine how responsible companies and their opportunities are.

The idea is to only invest in companies that match your idea of being socially responsible rather than invest in companies that contradict your own beliefs.

The environmental factors allow investors to consider how a company performs through an environmental lens. For example, investors who plan to invest socially responsibly will consider how high a company’s carbon emissions are if they have high pollution, how efficient they are, if they contribute to greenhouse gas emissions, and so forth.

Investors will likely stay away from companies with poor environmental performance and instead choose to 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 choose to 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 if the company makes any political contributions (and if so, to what politicians). Basically, this explores how ethical the company is and if 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.

See Related: Do ESG Investments Outperform the Market?

Does Socially Responsible Investing Make As Much Money?

Many people 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 and more ethically positive ventures. Perhaps it is because of the Paris Agreement or whether we’re caring 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 all shows that just because you are investing in companies that align with your own beliefs doesn’t mean you must compromise the amount of money you should expect to see in return.

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Why SRI Varies So Greatly

An SRI will look much 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 SRI’s idea varies depending on 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 with the same example of prioritizing the environment, this means that you would steer clear of companies that negatively affect the environment.

See Related: Best Socially Responsible Financial Advisors

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 positively impact the individual investors’ lives, too.

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

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 that happens due to giving back to your community, those in need, or to a cause that you believe in.

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

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 brain and make us feel peaceful, happy, and fulfilled.

Interestingly enough, there are more links between giving to causes we believe are essential and lower 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 brain.

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 you feel align with your own 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, it not only can make your wallet grow, it can make your brain feel good, too.

See Related: How to Create an Investment Thesis [Step-By-Step Guide]

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 on an individual level. 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 these companies a leg up, but you take away resources 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, often, environmental practices cost much more. But suppose companies see that they are losing investors to their competition who prioritize clean environmental practices.

In that case, this will increase the incentive to change their practices to get more backing from potential investors.

All in all, supporting companies that positively impact the environment will gradually help our planet turn away from our impending climate disaster.

See Related: Ethical Dividend Stocks to Invest in Today

For Society

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

When you back companies that push humanity towards a more just, equal, and healthier society, you can help improve the day-to-day life 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 can invest in companies that do inner-city outreach.

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

See Related: Best Artificial Intelligence ETFs to Invest in Today

How To Ethically Invest

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

As an investor, it can be a frustrating experience to put your faith in a company but then find out months later 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 a variety of 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 that 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, and so it’s always a good idea to never use the money on investments that you need for rent, food, and so forth.

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

See Related: Best Ethical Mortgage Lenders to Consider

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 dive into investments, 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 what you are 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’re free to begin researching companies to find some that align with your beliefs. When conducting your research, a great tool 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 own 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 how they are treated. 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 first must decide if you would like 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 use to diversify your portfolio, but make sure that you properly research the funds before you purchase to make sure 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 own set of beliefs. If you find yourself getting 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 to collaborate with. You can also use different sites like Morningstar or other investment companies. If you use 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 your personal investment goals and risk tolerance to choose which stocks and funds you 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 in 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, you can hire a financial advisor or use a robo-advisor to help vet your leads.

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