When you engage in socially responsible investing you are not only rewarding ethical companies. You are also punishing companies that are not doing the right things. On the other hand, you are investing for retirement and would like for your investments to result in a comfortable retirement. In that regard, does socially responsible investing make financial sense? What are the tradeoffs when you choose ethical investments and which socially responsible investments make the best financial sense? For that matter, how did socially responsible investing begin?
Origins of Socially Responsible Investing
If you go back far enough you find socially responsible investing as part of the Jewish traditions and in the USA the Methodists two hundred years ago practiced putting their money where their beliefs were by using ethical investing practices. More recently, during the 1960s anti-war sentiment led to many taking their money out of investments with defense contractors. As this practice took hold, investors boycotted South African investments to protest and eventually help end Apartheid in South Africa. And, as public concern about the environment rose to the fore, this became an investment focus as well.
Socially Responsible Investing – Making a Difference and Making Money
Millennials who want a better world to live in and baby boomers who want to leave a better world for generations to come both are active in socially responsible investing. As more and more investors have sought ethical investments, investments funds emerged that specialized in avoiding companies they believed harmed society. Because these funds (and the investors) wanted investments and not charitable giving, two things happened. The fund managers made it clear to companies that how they acted would affect how much investment they received. And, investment funds and individual investors looked at how ethical companies stacked up in terms of profitability. It turns out that ethical companies are generally well run and well run companies are generally more profitable!
Arguments against Socially Responsible Investing
The primary argument against this approach to investing is that you are foregoing profitable investments as you put your money where your heart is instead of using tools like fundamental analysis when investing in stocks. But, another concern is that you may invest in a company that talks a great environmental and socially responsible story but really does not follow through. Likewise, you may find companies who want to do the right thing but do not have the business sense to make any money! They work to make you feel good about investing in them and feel guilty if you don’t. Being able to sort out which is which is a necessary feature of success investing consistent with your beliefs.
Difference between Impact Investing and Socially Responsible Investing
Investing your heart generally has to do with effects on social issues, the environment, or governance. There are two ways that investors approach this subject. One is that they invest in or avoid companies because of a checklist of reasons. This is socially responsible investing. Many times it has as much to do with avoiding investments as with choosing them. Another approach is that the investor wants to make a difference, have an impact. This is impact investing in which one chooses based with a specific goal in mind. Examples typically include things like investing in companies working toward clean energy solutions, toxic waste cleanup, or ways to provide economical solutions for public transportation, clean water, or healthy food.
Socially Responsible Investing and Portfolio Diversification
Portfolio diversification is a tried and true way to protect your investments against horrific loss and also lock in possibilities for impressive gains. The traditional thinking is that when one sector goes does down, others may rise as investors move their money around. This approach applies to socially responsible investing as well. In fact, many investors may choose socially neutral investments as part of their portfolio in order to ensure price stability while investing in socially responsible investments with the rest of their portfolio. For many this is a safe and responsible trade off.
Socially Responsible Investment and Sustainability
As the world of socially responsible investing has matured this has come with a widespread realization that humankind is depleting many natural resources. The apparent trend to a hotter and hotter climate causes many to worry about the sustainability of the human race. Thus, a good portion of this sort of investing is now going to things like renewable energy, desalinization and other water purification projects, and products that are biodegradable unlike plastics that hang around for centuries.
Socially Responsible Investment Products
Although many investors want to invest in socially responsible companies, it can be quite a bit a work finding specific companies that fit your needs. However, there are several investing platforms in which you can invest and have your money go into areas that you support. Each has its own unique features.
These folks allow you to purchase individual stocks. They provide information that you can use to make your selections, protect your securities up to $500,000, and don’t have any hidden fees. Choose you category of good corporate behavior, fair labor, or sustainable planet and invest with dollar amounts. Their minimum investment is $250.
This is a public benefit corporation that has a well-diversified portfolio that can be used for direct investing or an IRA. Is a passive approach in which you fund your brokerage account and they handle your funds. They charge a 0.5% management fee. Their minimum investment is $100.
These folks offer an automatic service dedicated to investing in funds which they label as responsible and sustainable. They describe their service as providing time-efficient, low cost, smart investing. You can use them for direct investing for your IRA, 401 (k), and other tax-deferred investments. They have a 0.5% annual fee and require a $25,000 minimum investment.
If you like lots of choices, you will like these folks. They have a great deal of diversification and customization to their investing platform. Their minimum investment is $1 and their options include venture capital, bitcoin, and other alternative asset classes as well as impact causes. Their fee is 0.75% per year for accounts up to $50,000 and as low as 0.3% on accounts over $1,000,000. Other asset class fees are 1.5% or an IRA, 3.4% for a mutual fund, and 4.87% for hedge fund management.
Women may prefer this platform as they take the likely lifetime salary curve of a woman into account. They determine financial targets to meet your investing goals and factor in expected lifespan. There is no minimum investment amount or investment balance. Their management fee is 0.25% for the stand plan and 0.5% for a dedicated financial advisor.
These folks focus on investment in solar energy projects in the USA. They are an impact investment opportunity and aim to fund large and eco-friendly solar projects. When you gain a profit it is deposited directly into your bank account. They work with partners in solar energy, generally large outfits and actively manage their investments. Their minimum investment is $1,000 and their annual fee is 0.25%.
And, if you would like to add a few socially responsible investments to your portfolio, there are a whole host of apps that will let you screen for appropriate options.