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When it comes to making a positive difference in the world, investing might not be the first thing that comes to mind. But socially responsible investing is easier and more effective than ever.
A growing number of investors are embracing socially responsible investing, also known as sustainable investing or impact investing. It’s a way to make a change for the better while still making profits.
What Is Socially Responsible Investing?
Socially responsible investing (SRI) is an investing strategy that supports making a positive impact, as well as earning a financial return on your investment.
The definition of what makes an investment socially responsible varies by each individual investor.
Some socially responsible investors choose to invest in companies that focus on sustainable energy sources. Others may look for companies that are engaged in social justice initiatives.
And some investors consider themselves socially responsible simply because they don’t invest in businesses that go against their ethics — such as alcohol, firearms, or tobacco stocks.
Today, investing in companies that focus on things like social impact, sustainability, corporate responsibility, and other ESG (environmental, social, and governance) factors is a growing trend.
As with any type of investment, social investing comes with potential risks and returns.
Why Does Investing In Social Responsibility Matter?
Corporate social responsibility matters for many reasons beneficial to business. Besides adding shareholder value, corporate responsibility can improve morale and productivity. Corporate responsibility adds to the bottom line, which is — of course — profit.
However, corporate responsibility also means making a more positive impact while making greater profits.
A socially responsible investment strategy is starting to matter more to current generations. The phrase “voting with your dollars” is becoming more common. Companies are often losing business when there is a negative social impact.
In many cases, being socially responsible is simply a good business practice.
Defining Socially Responsible Terms
What is sustainability? It seems to have become a recent buzzword surrounding corporate responsibility. So what is corporate responsibility, then? Learning about financial independence comes with its own vocabulary, and now SRI comes with its own set of terms.
Dictionary.com defines sustainability as the “quality of not being harmful to the environment or depleting natural resources. and thereby supporting long-term ecological balance.” You will often see companies in the agricultural and retail industries talking about sustainability.
Per Wikipedia, corporate social responsibility is “a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering.”
The Library of Congress contains a resource guide to company profiles and their corporate social responsibility rankings. You may already be familiar with some of these resources. The Better Business Bureau, the EPA, and Fortune Magazine are just a few the Library of Congress Resource Guide mentions.
The Wall Street Journal also ranked the Top 250 Companies for Social Responsibility. In the list were technology giants such as Microsoft, HP Inc., Intel Corp., and Cisco Systems Inc.
ESG and SRI Similarities and Differences
Environmental, social & governance (ESG) differs from social responsibility in that the companies in an SRI fund are screened and given an ESG scorecard. As ESG spells out by name, the categories in which companies are scored are based on each focus:
- Environmental pertains to environmental factors such as the impact on natural resources.
- Social pertains to community aspects such as local community, employment, labor, healthcare, etc.
- Governance pertains to how the companies are run. The ethics of their business practice, diversity, wages, and voting rights encompass this focus.
What Is an ESG Scorecard?
There isn’t a standardized ESG scorecard, but several agencies do have their own. Different brokers may use a different agency to give their SRI funds an ESG scorecard. Each investment broker will either give their ESG scorecards to different corporations or use an outside agency, due to there not being a standard ESG scorecard.
Where Can I Find an SRI Fund?
You can find an SRI fund at a few of the most common brokerages that many in the financial independence community invest in. Betterment is one of the most popular options among beginning investors.
Aside from direct investments in single stocks, there are mutual funds and index funds that encompass SRI. There are even some index funds that encompass SRI. The financial independence community loves index funds for their low fees.
FinancialMechanic.com gives six specific examples of different focuses in SRI funds:
1. Corporate governance
2. Environmental Impact
3. Workplace practices
4. Product safety and impact
5. Human rights
6. Community impact
If you’re looking at a specific focus or value, finding the right fund may be easier thanks to this list.
Alternatives to SRI Investments
There are other ways to practice ethical investing outside an SRI fund. On the other hand, other extremes go against SRI investing. Investing in the blockchain and cryptocurrency can have negative effects on climate change and use a large number of fossil fuels.
Making an Impact on Local, State, and Federal Levels
Financial expert Tanja Hester suggests a more direct approach to investing in socially responsible companies. One suggestion is to change where you bank. Tanja suggests looking into smaller local banks or credit unions.
She also has a few other suggestions on making a direct impact, such as considering what you buy and where. Completely cutting out shopping at companies that don’t align with your values may be difficult. However, minimizing purchases from these companies is an option to consider.
In addition to cutting expenses, cutting utility use and putting pressure on companies is another option. Speak up against fossil fuel use by utility companies and demand shifting toward more renewable or sustainable energy sources.
Demand shifts not just by the utility and consumer companies. Tanja also suggests speaking up to the government on the state and federal levels. She also states that advocating for policy change is “one of the most responsible investments you can make.”
Laura from richandresilientliving.com tells of her adventures in crowdfunding as an alternative to SRI funds. Laura shares a few different companies and websites such as Wefunder.com, Urban Juncture, and Tradefox. Laura also shares crowdfunding resources such as buying a share of a farm, as well as her mistakes with socially responsible investing.
How I Invest In Corporate Responsibility Without Realizing It
Upon researching socially responsible investing, I realized that I am making more of an impact than I had once thought. After reading Tanja’s suggestions, I realized that I am making an impact with little changes.
Changing Consumption Habits
The main change was to improve my diet. Improving my diet in turn led me to invest in corporations that rate a bit higher in social responsibility. I also practice minimalism and try to buy high-quality, durable products instead of disposable ones. Also, consuming fewer resources to save money makes an impact.
I use less electricity whenever possible by keeping my heating and cooling at the highest or lowest point before discomfort occurs.
Buying From B Corporations
I purchase from companies that attempt to be carbon neutral or reduce their carbon footprint. My dieting choices led me to purchase foods from companies that have been certified humane and practice regenerative farming. I’m working to learn more about and support certified B corporations.
What Is a Certified B Corporation?
B corporations certifications are international, privatized certificates conferred by B Lab to companies with a social and environmental performance that receive a minimum score from an assessment in these areas.
Investing In Social Responsibility and Financial Independence
Investing for financial independence and investing in social responsibility may seem counterproductive. However, when I started being more mindful of my purchases, it led me to more focused and values-based spending. This, in turn, led me to a higher savings and investing rate.
Limited Access In Different Accounts
We may have limited access to SRI funds in our retirement accounts. Tami Mitchell, known as @disabledgirlfi on Twitter, states she is limited to funds in her ABLE account. This is upsetting as she wants to invest responsibly but is limited in her choices if she wants to invest for financial independence. Tami makes a social impact in her community by coordinating her local Buy Nothing group and other social investments. She has even helped ship unused medications to those who are unable to afford them.
Other employer-sponsored retirement plans often have higher fees and limited options as well. SRI funds may be limited or even unavailable in employer-sponsored retirement accounts. You could, however, compare different holdings in the broad-based index funds to the SRI funds and see how closely they match.
Individual retirement accounts often have better choices with lower fees and also access to more SRI funds. This is one option if you want to start investing responsibly. There is also the route of looking into the many other alternatives discussed previously. You can always also directly invest in companies you value by purchasing their goods and services, stocks, or looking at other investing options.
Research and Due Diligence
Like other investments, social investing comes with risk. Alongside that risk, the financial performance of those investments may be lower than investing in broad-based index funds or other large mutual funds.