Invest with a purpose through socially responsible investing (2024)

For a very long time, most investors have focused primarily on the financial data that companies provide. Investors looked for companies with a good track record of consistent profits, comfortable margins, and a solid balance sheet. But they didn’t necessarily look much into business practices, sustainability, working conditions, or other non-financial metrics.

That’s changed in recent years, as more and more investors are involving their own values and broader social trends in their investing decisions. The rise of socially responsible investing, also known as ESG investing or impact investing, is changing the financial industry.

But what is socially responsible investing, exactly? And how can you get involved?

Investing basics

Investing is a broad topic, so let’s first cover a bit of background.

Investors typically seek to grow their money by investing in assets that they believe will rise in value over time. The most common types of investment products are stocks (shares in large companies), bonds (government or corporate debt that investors can buy), real estate, and investment funds like exchange-traded funds and index funds (more on this later).

Individuals often invest for their future, with retirement savings being a primary goal for many. Others might invest for their children’s future college education, or save up for a down payment on a first home.

The investment approach that most investment advisers recommend — is to build a diversified investment portfolio made up of a variety of assets. And the typical goal of portfolio management is to invest in growing assets that will appreciate in value while managing risk by spreading out your assets.

Typically, investors are looking for companies that offer the financial benefits they are looking for. Some might opt for high-growth companies with a high potential for stock price growth, while others might look for well-established firms that pay high dividends (a form of income that some companies pay their investors from company profits).

What is socially responsible investing (SRI)?

Socially responsible investors take things a step further, by choosing investments based not only on their potential for growth but also on their broader impact. These investors might look at a company’s performance in regard to sustainability, advocacy, community development, gender diversity, and more.

For example, an investor might be choosing between two companies to purchase stock in. In addition to looking at each firm’s financial performance, a socially responsible investor might also look at how diverse each company’s executive team is and how the firms are taking steps toward social responsibility, sustainability, and inclusion.

The investor would then include these social metrics in their investment decision process — alongside each company’s financial metrics. Successful SRI investors will need to learn how to balance each relevant factor so that they can choose investments that align with their values but still have good odds of producing a profit.

Keep in mind that the factors that each investor considers will differ. For instance, someone who is gravely concerned about climate change may avoid fossil fuel companies and closely consider a company’s sustainability strategy. Someone who is more focused on human rights and gender equality may look more at worker conditions and gender diversity while making their decision.

What is ESG investing?

You may have come across the term “ESG” or seen ESG funds available through your investment broker. ESG stands for environmental, social, and governance. ESG investing screens companies based on their performance in those three key areas.

ESG investing has grown substantially in recent years, and fund managers and analysts now publish ESG ratings for certain companies. This makes it easier for investors to gain an understanding of a company’s ESG performance. Plus, the rise of ESG investing on a large scale is encouraging more companies to act responsibly (which in turn attracts more investment).

ESG vs. SRI vs. impact investing

All three of these terms are somewhat similar, in that investors who focus on these factors are looking for more than just financial returns out of their investments.

But to sum up, here are the key differences:

• ESG: This stands for environmental, social, and governance. Analysts can prepare ESG ratings for specific companies, giving investors a snapshot look at the company’s performance in those key areas. ESG factors are used as an investment screening tool, but investment returns are still the primary goal of most ESG investors.

• SRI: This stands for socially responsible investing. SRI investors might select investments based solely (or heavily) on a specific ethical or values-based consideration. For instance, an investor might choose to completely avoid fossil fuel companies or invest more in firms led by female CEOs.

• Impact investing: This focuses on the impact of an individual investor’s financial investment. Impact investors look to make a tangible social change with their money and may not prioritize financial returns at all. For instance, an impact investment might look like funding a research project into clean energy technology.

How can I get involved in socially responsible investing?

How can you include SRI themes in your investment strategy? Well, there are several ways to go about this — and the best method might depend on what specific social factor is most important to you. But ultimately, the simplest way that most investors can get involved is to take one of the following routes.

Invest in SRI/ESG exchange-traded funds (ETFs)

Exchange-traded funds are investment products that buy a wide variety of assets (most often stocks in companies) and then sell shares in the ETF to shareholders. This allows everyday investors to diversify into dozens or even hundreds of companies, with just the click of a mouse or a tap. Mutual funds are similar, and both mutual funds and ETFs can be purchased through an investment brokerage account.

There are thousands of these funds on the market, but some specialize in sustainable investing, ESG investing, or SRI investing. In fact, there are over 500 SRI funds and socially responsible mutual funds available today, according to a recent Morningstar report.

Invest in individual companies

Some investors choose to select specific companies to buy shares in. Investors can use online stock screening tools to identify investments. Or they can use unique search tools based on their specific investment preferences.

For instance, investors might wish to search for B-corps to invest in. B-corps are required to meet certain standards of social/environmental performance, transparency, and accountability, so many are aligned with socially responsible investing standards.

If you go this route, be sure to still build a diversified investment portfolio. If you need help, it’s a good idea to seek out investment advice from a qualified financial adviser.

Socially responsible investing looks beyond pure financial performance

While traditional investing focuses on returns (profits) and risk management over everything else, SRI considers broader social factors as well. If you’d like to incorporate your own values or broader social change initiatives into your investing efforts, screening investments based on SRI or ESG criteria is a good place to start.

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