A Beginner’s Guide to Socially Responsible Investing

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by Matthew Blume
The investing world can be an intimidating one, especially for those new to the game. You want to grow your portfolio with as little risk as possible, but you have no idea where to start. It’s a common fear, but one that can be quelled by buying shares in socially responsible businesses.

Why? For starters, it will give you, the investor, some peace of mind. Instead of monitoring the progress of whatever buzzworthy stock someone told you about, you can commit to investing in only the things that align with your morals and values.

Secondly, it’s a relatively safe bet. As a longtime portfolio manager to high-net-worth clients, I’ve seen socially responsible investing (SRI) strategies generate strong returns. Research indicates that this may be a byproduct of the lower risk profiles and strong corporate governance policies of the socially responsible companies many people are choosing to invest in.

Though SRI is a relatively new phenomenon, it is growing. Over the past few years, a heightened public focus on issues like the climate crisis and environmental sustainability has fueled its popularity — especially with younger investors. At the close of 2020, investors poured a record $12.2 billion into funds, claiming to invest based on environmental, social, and governance (ESG) factors. Some experts predict SRI will be a $50 trillion field in the next 20 years.

Even so, it’s not always easy to tell which publicly traded stocks and funds truly align with your values as an investor. While many companies have taken a public stance on social issues, and many more will likely follow suit, there are a couple of steps you can take to do your due diligence.

Pick your cause and stick with it.
In many instances, investors get told to think with their heads instead of their hearts. With SRI, you can afford to lean on the latter a bit more and really tie your personal beliefs to your investments. This means that before you decide on whether a particular investment is the right choice for your situation, you need to be clear about your personal values.

To start, review the 17 Sustainable Development Goals set by the United Nations — including metrics on issues like clean energy, gender equality, and climate action — and decide which companies strive to achieve the goals that matter most to you. Many of these funds or companies will have a stated commitment to furthering certain environmental or social causes (e.g., racial equality, clean food and energy, affordable housing, animal rights, etc.). This type of explicit commitment to societal good may appear in a company mission statement or a fund’s mandate.

Most investors hope to maximize returns over a given period of time, and ESG investors are no different. However, they also want to maximize the societal impact of their capital. With so many resources and products available to facilitate SRI, these investors can meet both needs — and perhaps even change the world in the process.Many newer investors tend to invest using pooled investment products, such as mutual funds or exchange-traded funds (ETFs), because these products can allow investors to efficiently diversify smaller sums of investment dollars.

In recent years, many new investment products have come to market with a focus on satisfying investors’ ESG needs. Managers of ESG-focused investment products should have an explicitly stated commitment to analyzing and considering non-financial factors before investing in a company.

Frequently, managers of these investment products make it clear that certain types of companies (e.g., fossil fuel companies, weapons manufacturers, etc.) should be avoided entirely within the portfolios they manage. Negative screening, as it’s called, was seen as the original type of SRI because it gave investors an opportunity to remove funds from their portfolios that contradict their internal values. So, if there is a particular type of business that doesn’t align with your moral or environmental values, look for mutual funds or ETFs that explicitly avoid these types of businesses.

Investing may be new territory for you. Even with a relatively small portfolio, it can be helpful to cull as much outside insight and expertise as possible to inform your decision-making.

Stay as updated as possible about the elements impacting your SRI portfolio. For instance, if you’re passionate about clean energy and have, as a result, invested in something like electric vehicles, monitor the latest trends in that industry. How is new technology going to influence the trajectory of your investment? Are any new regulations going to have looming effects on your portfolio? Keep an eye out.

If your portfolio is made up of mutual funds or ETFs rather than individual companies, resources like As You Sow allow you to plug in the ticker of a fund to review how it does across a variety of social impact measures, like relationship to fossil fuels or gender equality. That is an incredibly easy way to screen funds you might want to purchase. On the other hand, if your portfolio is made up of individual stocks, you can use data sources like Sustainalytics to research the ESG impact of each company. Note that this is going to be more time-consuming than managing a portfolio of funds, as you’ll need to research each company’s performance individually.

Another option is to find a financial advisor with an ESG background and let them do the heavy lifting for you. Connecting with a knowledgeable financial advisor can help you put your investment into perspective. Specifically, look to those with experience handling SRI who can shed light on how to handle certain situations, which types of stocks to pursue, which to avoid, and generally anything that’s going to properly balance risk with your desire to invest in social good.

SRI is an admirable and potentially profitable pursuit. But it needs to be done with a specific agenda, up-to-date information, and a clear understanding of the challenges involved. Always prioritize these elements in your portfolio management, and you’ll build a portfolio that may help your bottom line and your desire to affect the world positively.

Editor’s Note: The opinions expressed here are for general informational purposes only. It is important to do your own research and analysis before making any financial decisions. We recommend speaking to an independent advisor if you are unsure how to proceed.

Matthew Blume is a portfolio manager of private client accounts at Pekin Hardy Strauss Wealth Management. He also manages the firm’s ESG research and shareholder advocacy efforts. He earned a B.S. in electrical engineering from Valparaiso University and an MBA from Northwestern University’s Kellogg School of Management. Matthew is a CFA charterholder. (hbr.org)

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