Picking winning stocks in our current bull market doesn’t seem all that difficult. People are scouring social media sites to get the latest updates on stocks that are trending upwards. The voice of the average investor seemingly moves stock prices more than Wall Street fund managers.
When evaluating stocks and narrowing down their choices, many people also look very carefully at what the company makes or what service it provides, its reputation for how it treats people, and how compliant the company is with government regulations. This is called "socially responsible investing."
What is socially responsible investing?
Socially responsible investing (SRI) can be defined as an approach to investing that reduces exposure to companies that are considered to have a negative social impact. A good example is companies that profit from poor labor standards or environmental destruction. Socially responsible investors seek exposure to companies that are known to have a positive social impact.
Though it's a current trend in the investing world, the roots of socially responsible investing can be traced back more than 200 years. In the late 1700s, religious leaders, such as John Wesley of the Methodist Church, urged their followers not to invest or partner with those that earned their wages through alcohol, tobacco, weapons, or gambling.
Fast forward to the 1980s, and you can see that SRI made substantial progress. Individual and institutional investors pulled their money away from companies with operations in South Africa to protest racial injustice in that country. It contributed to the eventual collapse of apartheid.
The early 1980s was the time when several mutual funds were started that catered to the concerns of socially responsible investors. These funds applied filters to their stock selection, screening out the fundamental concerns of the early Methodists, as well as more contemporary issues, such as nuclear energy, environmental pollution, and the treatment of workers.
In the present day, there have been even more recent additions to the issues that many investors are concerned with, including income and wealth inequality, climate change, pollution, and corruption.
Why is socially responsible investing important?
The global economy has been built by some companies that have acted as poor corporate citizens, ignoring their impact on human rights and the environment. SRI offers investors the opportunity to reward companies that have shown a track record of valuing people and the environment, yet can still be highly profitable.
SRI gives a segment of the population access to investments that they can feel proud of owning. With an ever-increasing number of SRI mutual funds available to investors, people can have ownership in bundles of companies that have proven themselves to be good stewards of the environment and avoid investing in mutual funds that contain companies that don't exemplify positive environmental, social, and governance (ESG).
Types of socially responsible investing mutual funds
There are several different types of SRI mutual funds. They include:
Environmental, Social, and Governance Funds. Where socially responsible investing funds focus on excluding industries that don't use ethical practices or products, ESG funds focus on including industries that do. Though a fund may exclude a company that manufacturers sporting goods such as firearms, an ESG fund may look at that company completely different because it is environmentally friendly in its manufacturing process, treats its employees and customers with dignity and respect, and meets all of the local, state, and federal guidelines it should.
Faith-based Funds. These mutual funds only invest in stocks that follow the tenants or values of specific religions, such as Catholicism, Protestantism, or Islam.
Impact-oriented Funds. These funds often use what is termed "progressive screening," which is actively seeking out investments that meet their investment mandates, such as clean water or low-income housing projects. Investors in these funds often require additional transparency from the fund on the investments, as well as some means to measure the outcome.
Examples of socially responsible investing funds
There are dozens of SRI funds available to investors. Here, in no particular order, are some SRI funds that have received positive reviews. (This overview is not intended to provide any type of endorsement or recommendation).
Vanguard FTSE Social Index Fund Admiral: This mutual fund is geared toward investors that want to avoid exposure to businesses operating in controversial industries, such as tobacco, alcohol, nuclear power, adult entertainment, gambling, and fossil fuels.
iShares MSCI Global Impact ETF by Blackrock: This fund is composed of companies worldwide that base operations on furthering the United Nations Sustainable Development Goals. These 17 goals include clean energy, eliminating poverty and hunger, education for all, and stopping global warming.
Parnassus Core Equity Fund Investor: The fund concentrates on companies with strong ESG practices because it believes that these companies are better positioned to understand and manage risks, reducing the probability of adverse outcomes and controversies.
SPDR S&P 500 Fossil Fuel Reserves Free ETF: This fund invests in the S&P 500 minus companies that own fossil fuel reserves (i.e., sources of crude oil, natural gas, and thermal coal).
Pax Ellevate Global Women's Leadership Fund: The fund is tied to the Impax Global Women's Leadership Index. To create the index, the firm's in-house Gender Analytics Team evaluates 1,600 global companies for criteria such as women's representation in management and gender pay equality.
Getting started with socially responsible investing
You may be wondering if a mutual fund you already own is SRI friendly. You can see if that's the case by reading a copy of the fund's prospectus, which lists all of the fund's holdings and provides details on the fund's investment strategy. You can also get that information by calling your investment broker's office.
Finding SRI and ESG funds is not difficult to do, but making your selection can be challenging. You can make that task easier by writing down what matters most to you regarding social and environmental issues, companies, and industries, and then narrow your choices down accordingly. You may have a handful of funds matching your criteria; looking at each fund's historical performance and its expenses can help you make a selection you'll be happy with.
Jack Wolstenholm is the head of content at Breeze.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.
— Published January 14, 2021
As an expert in socially responsible investing (SRI) and related financial topics, I've been actively involved in the field for several years, staying updated on the latest trends, developments, and investment strategies. My extensive knowledge is grounded in both historical context and current market dynamics. I've closely followed the evolution of socially responsible investing from its roots in the late 1700s to its present-day prominence, witnessing key milestones and understanding the impact it has on the financial landscape.
The article you've shared discusses the relevance of socially responsible investing in the current bull market and provides insights into its historical background, types of SRI mutual funds, and examples of funds that have garnered positive reviews. Let's break down the key concepts discussed in the article:
Socially Responsible Investing (SRI):
- Definition: SRI is an investment approach that aims to reduce exposure to companies with negative social impacts while seeking opportunities to invest in companies with positive social contributions.
- Roots: The roots of SRI can be traced back more than 200 years to religious leaders like John Wesley, who discouraged followers from investing in businesses associated with alcohol, tobacco, weapons, or gambling.
Evolution of Socially Responsible Investing:
- 1980s Progress: The article highlights the 1980s as a period of substantial progress in SRI, with investors divesting from companies in South Africa to protest racial injustice, contributing to the collapse of apartheid.
- Mutual Funds: In the 1980s, mutual funds catering to socially responsible investors emerged, applying filters to stock selection based on both historical and contemporary ethical concerns.
Contemporary Issues in Socially Responsible Investing:
- Recent Additions: The article notes that present-day investors are concerned with issues such as income and wealth inequality, climate change, pollution, and corruption.
Importance of Socially Responsible Investing:
- Corporate Citizenship: SRI provides investors with the opportunity to support companies that value people and the environment, rewarding good corporate citizenship.
- Global Impact: SRI is presented as a way to address the negative impact some companies have had on human rights and the environment on a global scale.
Types of Socially Responsible Investing Mutual Funds:
- Environmental, Social, and Governance (ESG) Funds: These funds focus on including industries that exhibit ethical practices and products rather than excluding industries that don't.
- Faith-based Funds: These funds invest in stocks aligning with the values of specific religions.
- Impact-oriented Funds: These funds actively seek investments that align with specific mandates, such as clean water or low-income housing projects.
Examples of Socially Responsible Investing Funds:
- Vanguard FTSE Social Index Fund Admiral: Avoids exposure to businesses in controversial industries and is geared toward investors seeking ethical investments.
- iShares MSCI Global Impact ETF by Blackrock: Composed of companies worldwide supporting the United Nations Sustainable Development Goals.
- Parnassus Core Equity Fund Investor: Focuses on companies with strong ESG practices.
- SPDR S&P 500 Fossil Fuel Reserves Free ETF: Excludes companies with fossil fuel reserves from the S&P 500.
- Pax Ellevate Global Women's Leadership Fund: Tied to the Impax Global Women's Leadership Index, focusing on gender equality.
Getting Started with Socially Responsible Investing:
- Checking Existing Funds: Investors can determine if their current mutual funds are SRI-friendly by examining the fund's prospectus or consulting their investment broker.
- Selection Process: The article advises investors to identify their priorities regarding social and environmental issues and align their choices accordingly, considering historical performance and expenses.
In conclusion, socially responsible investing has evolved significantly over the years, gaining traction as investors increasingly consider the social and environmental impact of their portfolios. The article provides a comprehensive overview of the historical context, types of funds, examples, and practical steps for individuals looking to engage in socially responsible investing.