What Is Socially Responsible Investing (SRI)?

By Michael Flannelly · May 17, 2022 · 5 minute read

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What Is Socially Responsible Investing (SRI)?

Socially responsible investing (SRI) uses the power of investment capital to make the world a better place. By aligning their investments with their values, SRI investors can promote social good while also earning a financial return.

There are several motivations for building an SRI portfolio, including the personal values of individual investors, an institutional mission, or the demands of clients and other stakeholders. If you are interested in this investing style, it is helpful to know more about how socially responsible investing can fit into your portfolio.

How Socially Responsible Investing Works

Socially responsible investing (SRI), also known as sustainable, socially conscious, “green,” or ethical investing, is any investment strategy that seeks to consider both financial return and social and environmental good to bring about a positive change.

There are a few different ways to approach building an SRI portfolio; one of the most common is investing in companies working to solve social or environmental problems. For example, SRI investments might focus on companies involved in renewable energy, clean water, or affordable housing.

Another approach to SRI is to screen and avoid investments in companies involved in harmful activities to society or the environment. An SRI portfolio might avoid investments in companies that produce tobacco products, manufacture weapons, or engage in controversial activities like fracking.

SRI can also involve a more active approach, such as engagement with company management to encourage them to make changes that benefit society or the environment.

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An SRI strategy can be highly personal; investors, funds, or foundations make investment decisions aligned with their values. That means how investors define SRI and allocate assets accordingly can vary. However, investors and foundations increasingly use environmental, social, and corporate governance (ESG) criteria to make SRI investment decisions.

Example of Socially Responsible Investing

Interest in socially responsible investing has been gaining steam in recent years. Between 2018 and 2020, sustainably invested assets under management grew 42%, from $12 trillion to $17.1 trillion.

However, socially conscious investing isn’t a new strategy in the United States. The Quakers, a group of individuals who were part of the Religious Society of Friends in the 1700s, adhered to socially conscious business practices by refusing to participate in the slave trade.

Additionally, John Wesley, founder of the Methodist church, asked his followers not to invest in or partner with companies that could harm the community. This direction inspired many of them to avoid investing with anyone who earned income through alcohol, tobacco, gambling, or weapon sales, what we now sometimes call sin stocks.

In the 1980s, many investors pulled funds from companies that operated in South Africa because of racial inequalities associated with apartheid, while some mutual fund companies began making portfolio selections during this decade with an eye on social concerns.

More recently, investors are focusing on sustainable investments that promote a low-carbon future to combat climate change.

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Types of Socially Responsible Investments

Investors can make socially responsible investments in the stocks and bonds of companies that promote positive social and environmental values. Mutual funds and exchange-traded funds (ETF) with an SRI strategy are also potential investment vehicles.

Stocks

Investors can put money into various publicly-traded companies that adhere to a socially conscious mission. Socially responsible stocks take into account environmental and social factors when making business decisions. Many investors believe that companies that focus on SRI issues are more likely to be sustainable and profitable in the long term.

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Bonds

The bonds of corporations involved in socially responsible business practices can be a good option for investors interested in fixed-income securities. SRI bonds are bonds issued by companies that are seen as having a positive social and environmental impact.

Additionally, government bonds used to fund green energy projects can be an option for SRI investors.

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Mutual Funds and ETFs

Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds (ETFs) that provide exposure to socially responsible companies and investments. There are a growing number of index funds that invest in a basket of sustainable and socially-conscious stocks. These funds allow investors to diversify their holdings by investing in one security.

However, investors must consider each fund’s SRI strategy, holdings, and expense ratio before making investment decisions. Potential investors can find this information through the fund’s prospectus.

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Past Performance of SRI

The past performance of socially responsible investing has been mixed. Some studies have found that socially responsible investing can be profitable, where SRI funds outperform the market and benchmark indices. In contrast, other studies have found that SRI underperforms the market.

However, there is no definitive answer as to whether or not socially responsible investing outperforms the market. The answer may depend on the specific criteria used to define socially responsible investing and the period studied.

Risks of SRI

There are a few risks associated with socially responsible investing. One is that companies may not be as transparent as investors would like them to be about their social and environmental practices. This lack of transparency could lead to investors putting their money into companies that are not as socially responsible as they thought.

Another risk is that companies may change their social and environmental practices after the investment has been made. This could lead to investors not getting the return they were expecting, or even losing money.

Additionally, during periods of increased volatility – like changes in oil prices and a rising interest rate environment – there is potential for underperformance because company executives, policymakers, and investors are focused on other factors.

How to Start an SRI Investment Portfolio

If you are interested in creating an SRI portfolio, you can start by contacting a financial advisor or working with an investment firm specializing in SRI investing.

However, if you are ready to start investing and want to build a portfolio on your own, you can follow these steps:

•  Open a brokerage account: You will need to open a brokerage account and deposit money into it. Once your account is funded, you will be able to buy and sell stocks, mutual funds, and other securities. SoFi Invest® offers an active investing platform where you can start building your SRI portfolio.

•  Pick your assets: Decide what type of investment you want to make, whether in a stock of a company, an SRI-focused ETF or mutual fund, or bonds.

•  Do your research: It’s important to research the different companies and funds, and find a diversified selection that fits your desires and priorities.

•  Invest: Once you’re ready, make your investment and then monitor your portfolio to ensure that the assets in your portfolio have a positive social and financial impact.

It is important to remember that you should diversify your portfolio by investing in various asset classes. Diversification will help to reduce your risk and maximize your returns.

The Takeaway

There are a few reasons why socially responsible investing is important. For one, it allows investors to align their values with their investments. SRI investing can also help create positive social and environmental change. Finally, it can help investors avoid companies involved in unethical or harmful activities.

Investors interested in making socially responsible investments can use the SoFi investment app to help. With SoFi Invest, you can trade stocks and ETFs to build your SRI portfolio. And if you’re not ready to pick stocks and ETFs by yourself, SoFi’s automated investing tool will build a portfolio for you with no SoFi management fee.

Get started investing with SoFi Invest


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