What is socially responsible investment (SRI)? – Forbes Advisor

Socially Responsible Investing (SRI) is an investment strategy aimed at generating positive returns while promoting positive social and environmental outcomes. While this is a worthy goal in theory, there is some confusion about what SRI is and how he constructed his SRI portfolio.

What is socially responsible investment?

Socially responsible investing is the practice of investing for both social improvement and economic gain. This looks like either choosing an investment that fits your values ​​or avoiding an investment that doesn’t.

These various approaches can be broadly divided into negative and positive screening. In the former case, investors avoid borrowing securities sold by companies deemed socially unbeneficial. In the former, investors choose to actively support companies that implement positive social and environmental policies.

“For example, negative screening should exclude companies involved in weapons, defense, tobacco and fossil fuel extraction and production,” says Brian Presti, Certified SRI Counselor and Portfolio Strategy Director at The Colony Group.

Positive screening, on the other hand, looks for companies that offer products and services that contribute to decarbonization, financial inclusion, health and nutrition.

“With both approaches, investment decisions are driven by values ​​and social impact considerations,” says Presti.

How is SRI different from ESG?

ESG investing (another acronym for “environmental, social and governance”) is sometimes used interchangeably with SRI. However, these terms refer to two separate practices.

“The main difference is that ESG investing often uses a financial materiality lens for security selection, rather than being value-driven,” says Presti.

At its core, ESG is a risk mitigation strategy. ESG investors consider material risks to a company’s future performance due to the company’s environmental, social and governance practices.

A company that treats its employees poorly can lead to a worker strike. Companies with poor waste management practices can be fined or face government regulation.

Carey Burke, ESG/Sustainability Product Lead, Hartford Funds, said:

“Integrating ESG factors into the investment process does not imply that it will lead to positive ESG outcomes or constrain the investment universe, but it does bring additional considerations into the security selection process.” says Burke.

How can you make socially responsible investments?

Making socially responsible investments is not difficult as long as you know what values ​​you want to focus on or avoid.

For example, according to Morningstar, which counted 534 sustainable funds as of 2021, funds in the sustainable investing universe have grown fivefold over the past decade. More than 121 of these funds were newly launched that year, making him 48 more funds than launched in 2021. 2020.

The values ​​covered by SRI are environmental, social, religious, or anything else you care about.

Socially Responsible Mutual Funds and ETFs

Many mutual fund and ETF providers are now offering SRIs such as the Parnassus Core Equity Fund (PRBLX), which incorporates all ESG factors into their decision-making process, and the iShares Global Clean Energy ETF (ICLN), which invests in socially responsible companies. We offer options. Focus on clean energy.

Some fund providers only offer SRI investments. Calvert Investments offers over 20 of his SRI funds, including both stocks and bonds, as well as international and domestic options.

Be sure to do your homework and understand each fund or manager’s research and portfolio construction process, says Presti. We need to use the power of the ass to bring about positive change on material ESG issues.”

One of the strengths of mutual funds and ETFs is their ability to pool investor resources. This gives the fund greater leverage when seeking positive change in companies.

Through proxy voting guidelines, shareholder advocacy, public policy initiatives and corporate engagement practices, Presti said, we can see if fund managers are using their influence for the greater good. “These practices can help ensure long-term impact, value alignment and positive ESG outcomes.”

How to construct an SRI portfolio

The easiest way to build your own SRI portfolio is to have an advisor do it for you. A human financial advisor can do this, or you can rely on a robo-his advisor. Some robo-advisors offer socially responsible portfolio options.

Betterment lets you choose from three SRI portfolios based on your desired impact, with a focus on climate, society, or broader ESG. Wealthfront also offers socially responsible portfolio options. Both robo-advisors charge the same her 0.25% management fee for SRI options as they do for traditional portfolios.

If you want a more personalized approach, you can also build an SRI portfolio of your own selection of investments.

Historically, the most common method of constructing an SRI portfolio is to exclude companies deemed undesirable, such as those engaged in the tobacco and gambling industries, Burke says.

Disadvantages of Building Your Own SRI Portfolio

Using an exclusive approach to construct your own SRI portfolio has two main drawbacks.

First, if the industry we exclude has a period of strong performance, it may underperform in the broader market. The recent outperformance of energy stocks is a headwind for funds that exclude fossil-fuel producers or the energy sector as a whole, Presti said.

“Naturally, the lack of exposure to energy could have caused a tilt in other sectors, such as technology, that have performed poorly,” he adds.

A second pitfall of excluding specific industries is that it doesn’t guarantee that the rest of the portfolio will align with your values. “For example, a fossil fuel-free portfolio may include companies in the materials and industrial sectors that are not committed to responsible carbon emissions and pollution control,” he says Presti.

To mitigate these potential risks, we recommend incorporating a comprehensive analysis of ESG factors into your decision-making. This combination of SRI and ESG is common in many sustainable funds.

“But be aware that many ESG investment strategies use exclusion screening or otherwise, similar industries are often excluded as a result of the investment process,” adds Presti.

Is Socially Responsible Investment Profitable?

SRI focuses on creating positive social change by incorporating moral values ​​into investment decisions.

Socially responsible investors are more interested in ensuring that their investment funds support a good purpose, or at least avoid a bad purpose, than in minimizing the financial risks of unethical business practices. I’m here. Economic gain is secondary to doing good.

This does not mean that SRI cannot be both morally right and profitable. In 2022, Morningstar’s U.S. Sustainability Index will outperform its non-SRI parent by more than 0.6% and the S&P 500 by 0.7%. Similarly, most sustainable funds will outperform Morningstar category indices on a risk-adjusted return basis in 2021.

A meta-analysis of more than 1,000 research papers published between 2015 and 2020 by the NYU Stern Center for Sustainable Business found that among studies focused on risk-adjusted attributes, 59% were found to perform as well or better than traditional approaches, while 14% saw negative results.

If you are interested in SRI, be aware of the different types of investments available and understand how the providers you work with define the term. Not everyone applies it the same way, Burke says.

You also need to be open and transparent with financial professionals about what SRI means to you and how you want to invest, she says. As with any investment portfolio, she “ask about the risks and drawbacks of those decisions.”