The extraordinary growth of socially responsible investing strategies in the last decade, and especially the last couple of years, is bringing good news for performance-hungry investors, and potentially the planet as well.
In 2021 alone, socially responsible U.S. mutual funds saw inflows of some $70 billion — a 36% increase over 2020. And investors enjoyed returns comparable to, and in some cases better than conventional funds, according to a report by Morningstar, a fund rating and research firm, released in Feb. 2022.
Clearly the trend of doing well by doing some good in the world may have an upside. Here’s what you need to know about socially responsible investing (SRI) strategies now.
What Is Socially Responsible Investing?
Socially responsible investing is a broad term that can mean different things to different groups. SRI strategies may also be referred to as impact investing, sustainable investing, or ESG investing (for environmental, social, and government factors) — although these terms don’t always mean the same things, and “investing according to your values” can signify very different things to different people.
What Is the Difference Between SRI, ESG, and Other Strategies?
While the various terms for investing according to one’s values are often used interchangeably, it’s important for investors to understand some of the differences. Socially responsible or socially conscious investing are two of the broader labels, and they are typically used to reflect progressive values of protecting the planet and natural resources, treating people equitably, and emphasizing corporate responsibility.
Securities that embrace ESG principles, though, may be required to adhere to specific standards for protecting aspects of the environment (e.g. clean energy, water, and air); supporting social good (e.g. human rights, safe working conditions, equal opportunities); and corporate accountability (e.g. fighting corruption, balancing executive pay, and so on).
For example, third-party organizations have helped create ESG scores for companies and funds based on how well they adhere to various ESG factors.
Investors who believe in socially responsible investing, or sustainable investing may want to choose stocks, bonds, mutual funds, or exchange-traded funds (ETFs) that meet ESG standards.
What Is Sustainable Investing?
Sustainable investing is often used as a shorthand for securities that have a specific focus on protecting the environment. This term is sometimes used interchangeably with “green investing”, “eco-friendly investing”, or even ESG.
💡 Recommended: Beginner’s Guide to Sustainable Investing
What Is Impact Investing?
Impact investing is perhaps the broadest term of all, in that it can refer to a range of priorities, goals, or values that investors may want to pursue. To some degree, impact investing implies that the individual is investing with specific outcomes in mind: i.e. the growth of a certain sector, type of technology, or societal issue.
Either way, the underlying principle of these strategies is the same. By putting money into companies that embrace certain practices, investors can support organizations that embody certain principles, thereby potentially making a difference in the world, and perhaps earning a profit at the same time.
What Is Corporate Social Responsibility (CSR)?
Last, corporate social responsibility (CSR) refers to a general set of business practices that may positively impact society. Often, these decisions are put in place to support socially responsible movements, e.g. environmental sustainability, ethical labor practices, and social justice initiatives.
Ideally, CSR strategies work in tandem with traditional business objectives of hitting revenue and profit goals. But since CSR goals are specific to each company, they aren’t formally considered part of socially responsible, sustainable, or ESG investing.
The Growing Appeal of Socially Responsible Investments
While many investors find the idea of doing good or making an impact appealing, the question of profit has long been a point of debate within the industry. Do you sacrifice performance, a.k.a. making a profit, if you invest according to your conscience?
For a while it was difficult to make a clear case either way because most SRI and ESG funds didn’t have a long enough track record. Now, two separate studies from Morningstar suggest that funds which embrace socially responsible strategies tend to outperform conventional mutual funds. Their “Sustainable Funds U.S. Landscape Report” from February 2022 found that “two thirds of sustainable offerings in the large-blend category topped the U.S. market index last year compared with 54% of all funds in the category.”
An analysis of 745 European-based funds found that the majority of sustainable funds outperformed non-ESG strategies over one-, five-, and 10-year periods.
According to Morningstar, socially responsible strategies continue to gain traction with investors. In 2021, the number of open-end mutual funds and ETFs that claim some type of sustainable investing mandate increased from 413 to 534. Those funds now have more than $350 billion in assets, a 25% increase over 2020.
According to the report: “There are 5 times as many sustainable funds in the U.S. today than a decade ago, and 3 times more than five years ago.”
The Evolution of Responsible Investing
Socially conscious investing is not a new concept: People have been tailoring their investment strategies for generations, for a number of reasons, not all of them related to sustainability. In fact, it’s possible to view the emergence of socially conscious investing in three phases.
Phase 1: Exclusionary Strategies
Exclusionary strategies tend to focus on what not to invest in. For example, those who embrace Muslim, Mormon, Quaker, and other religions, were (and sometimes still are) directed to avoid investing in companies that run counter to the values of that faith. This is sometimes called faith-based investing.
Similarly, throughout history there have been groups as well as individuals who have taken a stand against certain industries or establishments by refusing to invest in related companies. Non-violent groups have traditionally avoided investing in companies that produce weapons. Others have skirted so-called “sin stocks”: companies that are involved in alcohol, tobacco, sex, and other businesses.
On a more global scale, widespread divestment of investor funds from companies in South Africa helped to dismantle the system of racial apartheid in South Africa in the 1980s.
Phase 2: Proactive Investing
Just like exclusionary strategies, proactive strategies are values-led. But rather than taking an avoidant approach, here investors put their money into companies and causes that match their beliefs.
For example, one of the earliest sustainable mutual funds was launched in 1971 by Pax World; the founders wanted to take a stand against chemical weapons in the Vietnam war and encourage investors to support more environmentally friendly businesses.
This approach gained steady interest from investors, as financial companies launched a range of funds that focused on supporting certain sectors. So-called green investing helped to establish numerous companies that have built sustainable energy platforms, for example.
Phase 3: Investing With Impact
With the rise of digital technology in the last 30 years, two things became possible.
First, financial institutions were able to create screening tools and filters to help investors gauge which companies actually adhered to certain standards — whether ethical, environmental, or something else. Second, the ability to track real-time company behavior and outcomes helped establish greater transparency — and accountability — for financial institutions evaluating these companies for their SRI fund offerings.
By 2006, the United Nations launched the Principles for Responsible Investment (PRI), a set of global standards that helped create a worldwide understanding of Environmental, Social, and Governance strategies.
ESG became the shorthand for companies that focus on protecting various aspects of the environment (including clean energy, water, and air); supporting social good (including human rights, safe working conditions, equal opportunities); and fair corporate governance (e.g. fighting corruption, balancing executive pay, and so on).
Why Choose Socially Responsible Investing?
While the three phases of socially responsible investing did emerge more or less chronologically, all three types of strategies still exist in various forms today. But the growing emphasis on corporate accountability in terms of outcomes — requiring companies to do more than just green-washing their policies, products, and marketing materials — has shifted investors’ focus to the measurable impacts of these strategies.
Now the reasons to choose SRI strategies are growing.
Investors Can Have an Impact
The whole notion of values-led investing is that by putting your money into organizations that align with your beliefs, you can make a tangible difference in the world. The performance of many sustainable funds, as noted above, indicates that it’s possible to support the growth of specific companies or sectors (although growth always entails risk, and past performance is no guarantee of future results).
Socially Responsible Strategies May Be Profitable, Too
As discussed earlier, the question of whether SRI and ESG funds are as profitable as they are ethical has long been a point of debate. But that skepticism is ebbing now, with new performance metrics suggesting that sustainable funds are on par with conventional funds.
Socially Responsible Investing May Help Mitigate Risk
ESG factors can help identify companies with poor governance practices or exposure to environmental and social risks, leading to financial losses. And during the Covid-19 pandemic, many ESG funds showed more resilience in the face of prolonged market volatility than conventional funds — indicating that ESG funds may offer some downside protection as part of an overall portfolio allocation.
ESG and SRI Strategies Are Gaining Popularity
The various benefits that ESG investing may offer seems to be attracting investors. Globally speaking, assets under management that adhere to ESG principles may surpass $41 trillion by the end of 2022, according to a 2022 report by Bloomberg Intelligence based on data from the Global Sustainable Investment Association.
At this rate, global AUM could reach $50 trillion by 2025 — a leap from the nearly $36 trillion in AUM at the start of 2020.
Do Retirement Accounts Offer Socially Responsible Investments?
Generally speaking, some retirement accounts may include socially responsible or ESG investment options. For example, when investing in a traditional, Roth, or SEP IRA, investors typically have access to all the securities offered by that financial institution, including stocks, bonds, and ETFs that may reflect ESG standards. The choice is up to individual investors.
That said, when dealing with an employer-sponsored 401k or 403b plan, the plan provider may or may not offer SRI or ESG options. Typically, ERISA standards for retirement plans dictate that the investment options offered by employer-sponsored plans “must be based on risk return factors that the fiduciary prudently determines are material to investment value.”
What that means, though, has been the subject of debate, especially over the last few years. In 2020, for example, the Department of Labor (DOL) issued a rule that might have limited or eliminated ESG investments in employer-sponsored plans. That was revised, however, in October of 2021 when another proposed rule re-opened the door to socially responsible investments in these plans.
The new proposed rule will likely be finalized at some point in 2022.
What Are Some Socially Responsible Investments?
Investors today can choose from a wide range of socially responsible, sustainable, or ESG stocks, bonds, ETFs, and more. These days, thousands of companies aim — or claim — to embrace ethical, social, environmental, or other standards, such as those put forth in the United Nations’ Principles of Responsible Investing, or the U.N.’s 17 Sustainable Development Goals.
In addition to those, there can also be various criteria set out by financial institutions or other organizations which they use to evaluate the products, processes, and policies of different companies. Here are some options.
What Are Socially Responsible Stocks?
It may be useful when selecting stocks that match your values to know the standards or metrics that have been used to verify a company’s ESG status.
Depending on your priorities, you could consider companies in the following sectors, or that embrace certain practices:
• Clean energy technology and production
• Supply chain upgrades
• Clean air and water technology, products, systems, manufacturing
• Racial and gender equality
• Fair labor standards
• Community outreach and support
Investors can also trade stocks of companies that are certified B Corporations (B Corps), which meet a higher standard for environmental sustainability in their businesses, or hit other metrics around public transparency and social justice, for example. B Corps can be any company, from bakeries to funeral homes, and may or may not be publicly traded.
What Are Socially Responsible Bonds?
Green bonds are issued by companies to finance projects and business operations that specifically address environmental and climate concerns, such as energy-efficient power plants, upgrades to municipal water systems, and so on.
These bonds may come with tax incentives, making them a more attractive investment than traditional bonds.
What Are Socially Responsible Mutual Funds and ETFs?
Another option for investors who don’t want to pick individual SRI or ESG stocks is to consider mutual funds and exchange-traded funds that provide exposure to socially responsible companies and other investments.
There are a growing number of index funds that invest in a basket of sustainable stocks and bonds. These funds allow investors to diversify their holdings by investing in one security.
What Are Socially Responsible Indexes?
There are numerous indexes that investors use as benchmarks for the performance of socially responsible funds. Three of the most prominent socially responsible indexes by parent company include: the MSCI USA Extended ESG Focus Index; Nasdaq 100 ESG Index; S&P 500 ESG Index. You cannot invest directly in an index.
Invest in Socially Responsible Funds With SoFi
Socially responsible investing is a broad term that can mean different things to different groups, but no matter which term you use — socially conscious investing, impact investing, ESG investing — it comes down to the compelling idea that by investing your money in organizations that match your values, you can make a difference in the world.
To gauge the appeal of these strategies, look to the remarkable growth of socially responsible funds worldwide. According to the Global Sustainable Investment Alliance report released in 2021, ESG assets under management (AUM) reached $35.3 trillion globally in early 2020, and are well over that today. Data from Morningstar released this year suggests that more than half of these funds are outperforming conventional funds, especially in the last three to five years.
If investing according to your values is something you’d like to do, consider opening an online brokerage account with SoFi Invest. You can trade stocks, ETFs, crypto, even IPO shares — all from the secure SoFi platform. Even better, you can access complimentary advice from financial professionals when you have questions. Develop your personal investing strategy today!
Is socially responsible investing profitable?
According to a 2022 report by Morningstar, the performance of sustainable funds was “on par with the overall fund universe in 2020” — and outperformed conventional funds over trailing three- and five-year periods.
What is the difference between ESG investing and socially responsible investing?
Socially responsible investing is considered a broad term that can encompass a range of practices and standards. ESG investing is a set of principles that is often used to assess how well companies meet specific, measurable criteria.
How many socially responsible investment opportunities are there?
It’s impossible to say how many SRI opportunities there are, as the stocks, bonds, and other securities that embrace ESG standards continue to grow. More than 120 new sustainable funds entered the SRI landscape in 2021, in addition to 26 existing funds that took on a sustainable mandate.
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