Socially responsible investing [SRI], also known as social investment, is an investment that is considered socially responsible due to the nature of the business the company conducts. A common theme for socially responsible investments is socially conscious investing. Socially responsible investments can be made into individual companies with good social value, or through a socially conscious mutual fund or exchange-traded fund [ETF].
Key Takeaways
- Socially responsible investing is the practice of investing money in companies and funds that have positive social impacts.
- Socially responsible investing has been growing in popularity in recent history.
- Investors should keep in mind that socially responsible investments are still investments and be sure to weigh the potential for return in their decisions.
- Community investing is a type of investing where the return is measured on community impact rather than monetary return.
- Socially responsible investments tend to mimic the political and social climate of the time.
Understanding Socially Responsible Investment [SRI]
Socially responsible investments include eschewing investments in companies that produce or sell addictive substances or activities [like alcohol, gambling, and tobacco] in favor of seeking out companies that are engaged in social justice, environmental sustainability, and alternative energy/clean technology efforts.
In recent history, socially conscious investing has been growing into a widely-followed practice, as there are dozens of new funds and pooled investment vehicles available for retail investors. Mutual funds and ETFs provide an added advantage in that investors can gain exposure to multiple companies across many sectors with a single investment. However, investors should read carefully through fund prospectuses to determine the exact philosophies being employed by fund managers, along with the potential profitability of these investments.
There are two inherent goals of socially responsible investing: social impact and financial gain. The two do not necessarily have to go hand in hand; just because an investment touts itself as socially responsible doesn't mean that it will provide investors with a good return and the promise of a good return is far from an assurance that the nature of the company involved is socially conscious. An investor must still assess the financial outlook of the investment while trying to gauge its social value.
Demand for ESG investments soared in 2020. Nearly 60% of respondents to an Investopedia and Treehugger survey indicated an increase in interest in ESG investments and 19% reported incorporating ESG standards into their portfolios.
Special Considerations
Socially responsible investments tend to mimic the political and social climate of the time. That is an important risk for investors to understand, because if an investment is based on a social value, then the investment may suffer if that social value falls out of favor among investors.
For this reason, socially responsible investing is often considered by investment professionals through the lens of environmental, social, and governance [ESG] factors for investing. This approach focuses on the company's management practices and whether they tend toward sustainability and community improvement. There is evidence that a focus on this approach can improve returns, whereas there is no evidence for investing success from investing purely on social values alone.
For example, in the 1960s, investors were mainly concerned with contributing to causes such as women's rights, civil rights, and the anti-war movement. Martin Luther King Jr. played a large role in raising awareness for the civil rights movement by targeting companies that opposed the cause as socially irresponsible.
As awareness has grown in recent years over global warming and climate change, socially responsible investing has trended toward companies that positively impact the environment by reducing emissions or investing in sustainable or clean energy sources. Consequently, these investments avoid industries such as coal mining due to the negative environmental impact of their business practices.
One form of socially responsible investing involves promoting racial justice, equality, and inclusion. Known as racial justice investing, the purpose is to leverage both institutional and retail dollars to invest in ways that advance this and other anti-racist causes.
Example of Socially Responsible Investing
One example of socially responsible investing is community investing, which goes directly toward organizations that both have a track record of social responsibility through helping the community, and have been unable to garner 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.
Where Can Socially Responsible Investments Be Made?
They can be made into individual companies that have good social value or through a socially conscious mutual fund or exchange-traded fund [ETF].
What Does ESG Represent?
ESG stands for environmental, social, and governance, which are important factors for some investors to adhere to. Those investors look for solid management of a company and seek out those that gear toward sustainability and community improvement. In 2020, the popularity of ESG investments took off.
Which Are Among the Top Socially Responsible Bond ETFs?
They are VanEck Investment Grade Floating Rate ETF [FLTR], issued by VanEck; SPDR Bloomberg Investment Grade Floating Rate ETF [FLRN], issued by State Street; and iShares Floating Rate Bond ETF [FLOT], issued by BlackRock Financial Management.