Yesterday was Earth Day, and the event encouraged many people to start thinking about their investments and whether or not they support companies that have policies and practices that are environmentally friendly and socially responsible. Socially responsible investing is growing in popularity as an increasing number of people wish to embrace an investment strategy that takes the good of society into account as well as returns.
The practice of socially responsible investing in the Americas goes all the way back to the middle of the 18th Century, when Quakers insisted that their congregants avoid investments in enterprises related to the slave trade. Today, socially responsible investing encompasses an awareness of whether a company has practices in line with diversity, transparent and ethical corporate governance, consumer protection, environmentally sustainable efforts and human rights. Socially responsible investing can also include choosing investments based on how well they align with religious beliefs; Christian and Muslim investing are two growing strategies within the religious financial realm.
Socially Responsible Mutual Funds and Exchange Traded Funds
One way to make socially responsible investments is to choose mutual funds and exchange traded funds (ETFs) composed of companies that have approved practices. Most socially responsible funds and ETFs do not include companies that do business with countries that violate human rights, such as Somalia or Sudan. Additionally, many funds avoid including companies that represent “sin” stocks, such as tobacco, alcohol or gambling. It is also possible to choose funds, such as the The Sierra Club mutual fund, that avoids including companies that pollute excessively. You can find a number of socially conscious funds, and their criteria, on SocialFunds.com. It is possible to use the criteria posted by a fund to determine how closely it aligns with your values. The downside to socially responsible mutual funds is that the fees are often higher than other funds. Imagine an actively managed fund, and then add 0.5% to 1% to the fee. The argument, of course, is that as soon as the fund starts increasing its returns, the fees will be reduced. But I wouldn’t count on it.
For those who want to combine two investing trends, it is possible to invest in socially responsible ETFs. There are a number of exchange traded funds that include companies with approved social practices, as well as funds that include only companies that are related to the production of clean energy. And, finally, there are socially responsible index funds. These funds track indexes such as the Domini 400 Social Index and the Citizens Index. There are a number of indexes now (including the Dow Jones Sustainability Index) that are composed solely of socially responsible companies. The fees on socially responsible ETFs and index funds are generally lower than the fees charged by their mutual fund counterparts.
Investing in socially responsible companies
If you are interested in investing in individual companies, it is possible to find companies that are socially responsible. One of the easiest things to do is to look at which companies are included in funds and on socially responsible indexes. In order to be included, companies have to meet certain criteria. However, it is a good idea to check the criteria the funds set; some only require a very small threshold of policy that may not be stringent enough for some socially conscious investors. And some socially responsible investors decry the inclusion of some oil and nuclear power companies in a few of the environmentally friendly funds.
Another place to look for socially responsible investing ideas is SustainableBusiness.com. This site keeps track of sustainable companies, putting out lists of the most sustainable stocks available. Many of the stocks are reasonably good performers, appearing on top stock indexes around the world. Indeed, it is possible to diversify a socially responsible stock portfolio to include small cap and large cap companies, as well as domestic and foreign companies.