A Simple Guide to Socially Responsible Investing


You may have heard that Stanford, Harvard, and other universities have divested certain stocks from their endowments, such as coal and oil companies. The idea is to make an anti-climate-change statement and deprive such industries of capital.

Increasingly, individuals are also realizing that their investments aren't just a way to save for retirement — but a way to boost companies we like, and withhold support from companies we don't.

But can you afford to think about the social impact of your investments? Before you decide whether socially responsible investing is for you, learn what it's about.

It's Not New

Socially responsible investing, also referred to as "green investing," "sustainable, responsible, and impact investing," or just plain "sustainable investing," was around long before we had these names for it. As far back as 1700s, some American churches urged their parishioners not to invest in slavery, alcohol, or war. During the Vietnam War, thousands divested from Dow Chemical after seeing a horrifying image of a Vietnamese child being burned by napalm. In the 1980s, investor pressure was a major force in ending South African apartheid.

It's Growing

Since the 1980s, socially responsible investing has become a greater part of mainstream investing, with mutual funds, index funds, and other vehicles available to the average investor. From 2012 to 2014, the number of assets managed using these strategies increased by 75% to $6.57 trillion, according to The Forum for Sustainable and Responsible Investment. That's about a buck out of every $6 invested in the United States.

It Screens Out Companies Based on Set Principles

An SRI fund manager doesn't simply decide what constitutes a "good" company based on their personal values. Based on a few main categories — such as environmental impact, social behavior, corporate governance, and the type of product or service offered — managers screen out companies that don't measure up to predetermined standards.

For instance, the TIAA-CREF Social Choice Equity Fund favors "companies that are strong stewards of the environment; devoted to serving local communities; committed to higher labor standards; dedicated to producing high-quality and safe products; and those managed in an exemplary or ethical manner." The Portfolio 21 Global Equity Fund "excludes companies directly engaged in fossil fuel exploration and production, weapons manufacturing, egregious labor practices," and other behaviors.

SRI Doesn't Mean Sacrificing Returns

"You do not have to assume you are making a financial sacrifice if you use mutual funds that do socially responsible investing screening," said J. Patrick Costello, founder of Green River Financial Services.

Socially responsible funds apply similar strategies to those of mainstream funds, with the same goal of maximizing returns. The only difference is that the SRI funds are picking their winners out of a pre-screened pool of companies they consider to be more responsible than the rest.

"Sustainable investing does not attempt to select just a few obscure companies that get a perfect record. We just try to narrow the group of companies, exclude the companies with the worst behaviors, and emphasize the companies with the better behaviors, within realistic bounds," Costello said.

In fact, there is evidence that some socially responsible moves, such as including more women in the corporate ranks, make for better returns, Costello said.

You Probably Don't Need to Change Investment Providers to Try It

If your retirement fund is with Vanguard, TIAA-CREF, or another large investment firm, they probably have one or more socially responsible funds to choose from.

It May Not Be for You

Despite the win-win appeal of doing good without giving up financial returns, not every investor buys into the promise of socially responsible investing. One problem with such funds is that the definition of socially responsible can vary, and any fund available may well include some companies that you personally find objectionable. For example, some funds include McDonald's, a company whose labor practices and history of pushing high-calorie, low-nutrient foods on children turn many socially conscious folks off.

If you choose to pursue socially responsible investing, you still have to do the standard due diligence that you would do before investing in any fund. Ultimately, the decision of how and where to invest remains yours alone.

Are you a socially responsible investor? How do you choose your investments?

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