Five Steps to Socially Responsible Investing

By: Andrew McShane

Steps you can take right now to invest in a better future for yourself and the world

You are about to learn...

  • Is SRI right for you
  • Criteria for a Socially Responsible Investment
  • Action to take to determine a SRI company
  • What a reasonable return should be for an Socially Responsible Investment

Socially responsible investing (“SRI”) is a growing trend in the United States and around the world.

But terms used around this type of investing is not always easy to understand, particularly if you’ve only just started to invest your hard-earned money.

SRI is generally defined as investing in companies that are involved in positive social change and avoiding those companies that are thought of doing harm to society in some way or another.

As an example, investing in education or renewable energy businesses would be an acceptable investment under SRI. Both of these types of companies are perceived as doing social good.

Investing in fossil fuel or tobacco companies would be unacceptable because they are perceived as being harmful to the environment and/or society.

Here are the five steps to follow if you want to get started with this type of investing:

Consider if you really want the added complexity of socially responsible investing.

This is true if you are using a financial advisor or making your investing choices on you own.

Let’s face it, finding the time to research companies you are considering for investment can be difficult and time consuming. This is true especially if you are just starting out.

It is hard enough to read and study the public filings of a company when they report on a quarterly basis. And then you really should listen to or read the management conference calls to get an understanding of the health of a company.

Finding the time to research an additional layer of information to determine how a company has a positive impact on social and environmental issues can be more difficult. And the information is not easily accessible like the financial statements of a public company.

Ask yourself if your conviction around wanting to hold companies responsible for their social impact is reasonable given the time that you have to devote to the cause.

Given that assets under management around socially responsible investing has swelled to more than $12 trillion, clearly many people have decided to jump into this kind of investing, at least with a portion of their investment funds.

Develop the Right Criteria for Investing in an SRI

Call it an esg criteria, meaning the strategy around how to evaluate companies for their positions on environmental, social and governance issues.

At its simplest, you could use a criterion that says you are not going to invest in companies that are obviously doing social or environmental harm. As mentioned above fossil fuel or tobacco companies would qualify for avoidance. Gaming companies would be another type of company to avoid under this criterion. Few would argue that any of these businesses are doing any kind of societal good.

A more complicated criterion would be to say not only are you going to avoid companies that are doing harm to society, but to also avoid companies that are more indirectly doing harm.

Examples would include say airlines, trucking and railroad companies. These companies are not harming society as directly as say tobacco companies. For example, it is debatable if the benefits of the services they provide are outweighed by the harm to our environment while providing those services.

The strictest criterion is to say you are only going to invest in companies that are doing good for society. This is the highest bar from a criterion standpoint because it means that the business needs to demonstrate they are doing good for society, not just demonstrate that they are not doing harm.

As mentioned above, these would be companies in the education and renewable energy field that would fit.

Determine if you will be able to do the research around sustainable investing and still be able to achieve an acceptable financial return

Historically most people would outsource their investing decisions to a third party or mutual fund. This is true for investing in general and for socially responsible investing as well.

But with the so much information being available on the web and so many low-cost brokerage firms available like Schwab or Robinhood, many people feel empowered to do their own research and make decisions.

Determine what a reasonable return is for you around investing.

And then determine whether you are willing to sacrifice any of that targeted financial return in order to invest in socially conscious companies.

Major stock market averages have averaged 9% to 10% positive returns per year over the long run. Although there is no guarantee will occur going forward, that should be a target for you in general. Make sure any socially responsible investing at least keeps up with the market averages like the S&P 500 in order to do no hard to your investment returns.

Sit back and try to relax. Keep an eye on the companies that you’ve invested in to make sure that the work they are doing to benefit society is working and make sure their financial profitability is not being harmed by those efforts.

There are many investing strategies available that lead to successful financial returns. The great thing about socially responsible investing is that you are doing something good for the world while you are hopefully achieving successful financial returns. This type of investing is at least worth looking into to see if it is right for you.

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