Michael GrawSocially responsible investing is a method of investing that many individuals use to express their values while investing. In socially responsible investing, also known as SRI investing, financial return is often a secondary consideration to investing in companies or assets that are bettering the world.
In this guide, we’ll take a closer look at socially responsible investing and explain everything beginners need to know to get started with SRI investing.
Socially Responsible Investing Explained
Socially responsible investing is a specific form of sustainable investing in which investors put their moral and ethical values above financial performance. That is, instead of investing in specific companies or assets solely because of their potential monetary returns, SRI investors invest in companies or assets that contribute to a cause they care about.
Financial performance still matters in socially responsible investing, but it’s not the only consideration like it is for many other types of investing. SRI investors may be willing to give up some gains if it means, for example, investing in a company that is reducing its carbon footprint or that has a strong record on human rights.
With many investors turning to green energy investing in 2023 it’s not surprising that most brokers now support renewable energy assets. The values that socially responsible investors choose to focus on are varied and depend on the individual. Some SRI investors care primarily about the environment and invest in companies that are cutting greenhouse gas emissions or developing green technology. For example, an SRI investor might choose to invest in a company that is trying to achieve net-zero emissions as opposed to a peer company that has better financial performance but no environmental goals.
Other SRI investors support companies that are building more diverse workforces or speaking out against human rights abuses in their industry’s supply chains. For example, an investor might choose to invest in a company that recently added several women and people of color to its board as opposed to a company that has an all-white or all-male board.
You can invest in socially responsible company stocks as well as funds using regulated brokers such as eToro.
78% of retail investor accounts lose money when trading CFDs with this provider.
How Does Socially Responsible Investing Work?
Socially responsible investing works at a basic level like most other types of investing. Investors need to decide what types of assets or companies they want to invest in, build an investment thesis, and use a brokerage firm to invest.
The difference is that SRI investors will typically start the process of finding investments by considering their values. An SRI investor might make a list of causes that they want to support with their investments, then make a list of companies or assets that support those causes in some way. Investors can then go through the normal process of evaluating risk and performance based only on that shortlist of value-driven assets to decide what to invest in.
Finding socially responsible investments can require a lot of research on the part of individual investors. Investors often need to dig into companies’ annual reports and sustainability reports to find out what social and environmental initiatives they have in place. Investors also need to decide for themselves whether what a company is doing is having an impact and whether the company’s motives are aligned with their own.
Ultimately, no two socially responsible investors will be exactly alike in their investments. Each investor will have their own values to follow and subsequently make their own decisions about what socially responsible investments make sense for their portfolio.
SRI vs ESG Investing
SRI investing has a lot in common with ESG investing, which stands for Environmental, Social, and Governance investing. Both types of investment focus on companies that are doing good for the world in some way, such as cutting their carbon emissions or improving diversity in the workforce.
However, SRI and ESG investing differ in their primary goal. SRI investors put their values first and financial performance second. That is, they may be willing to sacrifice some financial return in exchange for supporting social causes that they care deeply about.
ESG investors, on the other hand, see financial performance and social good as working hand-in-hand. The idea is that companies that focus on sustainability or social causes will benefit financially in the long run, and so ESG stocks will ultimately outperform their non-ESG peers. So, ESG investors don’t see themselves as giving up any financial returns relative to investing in a traditional portfolio.
In practice, SRI and ESG investing can be quite similar both in what investments they target and in their overall performance. While SRI investors may be willing to give up potential returns, it is entirely possible that their investments outperform – potentially even in part because of their socially responsible nature.
Types of Socially Responsible Investments
There are several popular types of socially responsible investments that investors can use to express their values
Carbon Credits
Carbon credits are a type of commodity traded in places like Europe, the state of California, the UK, China, and New Zealand in order to put a price on carbon emissions. Companies earn carbon credits when they reduce their emissions, and companies that have a lot of emissions need to purchase carbon credits to pay for their emissions. This creates a market for carbon credits that trade between companies.
Individual investors can invest in carbon credits through carbon credit futures. These are contracts that give investors the right to buy carbon credits on a future date at a predetermined price. In effect, these contracts enable investors to bet that the value of carbon credits will rise.
If enough investors speculate that carbon credits will rise in value, this can have the effect of raising the price of carbon credits. This benefits companies that have reduced their emissions and have carbon credits to sell. It also incentivizes companies that are large emitters and have to buy carbon credits to work harder to reduce their emissions.
Socially Responsible Stock Investing
Another popular approach is socially responsible stock investing, in which investors buy shares of individual companies that are promoting SRI values. Individuals can invest in companies that have made pledges to reduce their carbon emissions, to promote minorities in their workforces, to take a stand on human rights, to achieve gender pay equality, and more.
Finding socially responsible companies to invest in is one of the biggest challenges to this approach. Investors need to do their own research, including reading through companies’ sustainability reports to find out whether they’re making progress towards their stated social goals.
The benefit to investing in socially responsible companies is that SRI investors can build a custom portfolio based on their values. Shareholders also get voting rights when buying shares of many companies, so they can express their values when voting on board members or other major initiatives.
Socially Responsible Investment Funds
Socially responsible investment funds are mutual funds and ETFs (exchange-traded funds) that invest in a variety of socially responsible assets. They offer a relatively simple solution to investing in socially responsible companies, although funds offer less customization than building a portfolio of individual stocks. Socially responsible ETFs can also be used to invest in carbon credits.
There are several different types of socially responsible investing funds. Some invest broadly across many different SRI categories, including environmental responsibility, social responsibility, and corporate governance. Others invest specifically based on certain values, such as ETFs that invest in renewable energy stocks to fight climate change.
Socially Responsible Bonds
Investors can also invest in socially responsible investing companies and in government social initiatives through bonds. Bonds are effectively I.O.U. notes that yield interest, plus the eventual return of the money that investors paid to purchase the bond.
SRI bond investments can invest in bonds from an individual company that meets an investor’s social values or from a local government that is issuing bonds to raise money for, as an example, affordable housing. Investors can also find socially responsible bond ETFs and mutual funds.
Microfinance
Microfinance is a catch-all term for individual investing on a small scale, outside of traditional markets. Often, microfinance takes the form of making a loan or investing in local businesses or community programs. These local businesses may reflect investors’ values while also giving them a way to put money into their own communities.
Microfinance can also be treated as a socially responsible investment in its own right, regardless of the values of the business being invested in. There are a handful of nonprofits and investment programs that enable socially responsible investors to invest in small businesses in the developing world. Often, these investments can be as small as a few dollars and can potentially make a significant difference in the ability of someone in a developing country to get their business off the ground.
Examples of Socially Responsible Investment Assets
We’ll cover some examples of popular socially responsible investments. These are just examples and investors can find many more SRI investments through their own research.
1. iShares Global Clean Energy ETF (ICLN) – ETF Focused on Cutting Carbon Emissions
The iShares Global Clean Energy ETF is one of the largest clean energy funds in the world, with more than $5.6 billion in assets under management. The fund invests in a wide range of companies that are involved in developing renewable energy technology, including wind, solar, and electric vehicle tech.
Some of the top holdings in this socially responsible ETF include Enphase Energy, First Solar, Plug Power, and Vestas Wind Systems. The fund also invests in biotech stocks that are working on biofuel production and in utility companies that are promoting the switch to fossil fuel-free energy sources.
The ICLN fund has a 5-year return of 19.16% and an expense ratio of 0.40%.
78% of retail investor accounts lose money when trading CFDs with this provider.
2. Tesla (TSLA) – One of the World’s Leading Electric Car Manufacturers
Tesla is a popular socially responsible investment among investors who want to use their capital to fight climate change. The company is one of the world’s leading electric car manufacturers and has been critical in pushing other automakers towards building electric vehicles. Tesla is also a leader in developing the battery technology that will be increasingly important in an electrified world.
However, Tesla could present a contradiction for some ESG investors. The company was kicked out of the S&P 500’s ESG stocks index because of issues around how it treats employees.
Tesla stock rose nearly 50% in 2021, but is currently down about 30% from its all-time high.
78% of retail investor accounts lose money when trading CFDs with this provider.
3. TIAA-CREF Core Impact Bond Fund (TSBIX) – Bond ETF Supporting Disadvantaged Communities
The TIAA-CREF Core Impact Bond Fund is a bond ETF with social responsibility at its core. Instead of investing in bonds from major companies, this socially responsible investing fund invests directly in bonds that support economically disadvantaged communities. That includes investments in federal and local government bonds that support affordable housing in the US.
The fund pays a yield of 3.8% to investors and has a 5-year average annualized return of 0.56%.
78% of retail investor accounts lose money when trading CFDs with this provider.
4. KraneShares Global Carbon Strategy ETF (KRBN) – Carbon Credit ETF with Global Exposure
The KraneShares Global Carbon Strategy ETF is an index fund that’s benchmarked to the IHS Markit Global Carbon Index. It invests in a wide variety of carbon credit futures from the European Union, UK, and California. It’s one of the largest carbon credit ETFs in the world with more than $800 million in assets under management.
The fund, which launched in 2020, has gained more than 120% in value since inception.
78% of retail investor accounts lose money when trading CFDs with this provider.
5. Aflac (AFL) – Ethical Stock Focused on Sustainability and Equality
Aflac is one of the largest insurance companies in the US and one of the most awarded companies when it comes to social responsibility. Aflac has been honored by Ethisphere 16 years in a row.
The company recently announced a goal to become carbon-neutral and launched a $250 million green investment fund to promote environmental sustainability. On top of that, the company donated more than $150 million to cancer research last year and supported more than 140,000 pediatric cancer patients and their families during treatment.
Aflac also has a fair employment policy that promotes women and people of color. Nearly two-thirds of the company’s board members are women and minority individuals.
Aflac stock is up more than 5% since the start of 2022, bucking the trend of the overall stock market. The company also pays a dividend yield of 2.61%.
78% of retail investor accounts lose money when trading CFDs with this provider.
Why Do People Make Socially Responsible Investments?
Investors choose to make socially responsible investments for several different reasons.
The most common reason is that investors want to express their personal values when investing their money. Investors know that investing supports companies and assets, and so they want to support companies that care about the things that are important to them. As more investors take social responsibility into account, companies may also be incentivized to give more weight to social responsibility in their decision-making.
Another reason why some investors opt for SRI investing is that it can pay off. While SRI investing does not have financial return as its primary goal, social responsibility and financial performance can go hand in hand. This is, after all, the thesis behind ESG investing, and it applies as well to SRI investing even if it’s not the main focus.
On a broader scale, socially responsible investing can have large-scale benefits. For example, socially responsible investing can encourage companies to reduce their carbon emissions and slow the pace of climate change. It can also lead to increased participation of minorities in corporate leadership positions or help remove human rights violations from supply chains.
How to Find Socially Responsible Investment Assets
One of the most challenging parts of investing in socially responsible funds and companies is finding assets that match an investor’s values. While there are lists of socially responsible and ethical stocks, investors often have to do their own research in order to evaluate companies’ initiatives and actions.
Lists of SRI and ESG stocks can be a good place for investors to start to create a list of companies to investigate further. From there, investors may want to check out companies’ annual reports or sustainability reports for more information. There are also organizations that track corporate responsibility, such as Ethisphere, that can provide useful information.
Brokers Offering Socially Responsible Investments
Many stock brokers offer trading on socially responsible stocks and funds. Brokers that offer trading on futures may also offer trading on individual carbon credit futures contracts.
One broker that investors can consider using for SRI investing is eToro. eToro offers 0% commission trades on hundreds of stocks and ETFs from around the world, including stocks and funds that many investors would consider to be socially responsible investments.
For example, eToro offers trading on Tesla and Aflac shares, the iShares Global Clean Energy ETF, and the KraneShares Global Carbon Strategy ETF. Investors can also buy and sell carbon credit futures through CFDs (contracts for difference) on eToro.
This investment platform offers a number of useful tools for investors, including a comprehensive charting and analysis platform. Users have access to dozens of built-in technical indicators as well as drawing tools. eToro also offers professional fundamental analysis for many popular stocks.
Another reason many investors choose eToro is that the brokerage has a copy trading platform. Investors can copy the portfolio of a more experienced investor and their positions will be bought or sold automatically. The copy trading platform includes investors who are focused on socially responsible investing.
Investors can open an account with eToro with as little as $10. The broker provides 24/5 customer support.
78% of retail investor accounts lose money when trading CFDs with this provider.
Conclusion
Socially responsible investing offers a way for investors to express their values through their investments. SRI investors can invest in assets like individual stocks, socially responsible investing funds, bonds, carbon credits, and more. Many brokers, including eToro, offer access to socially responsible investments.
FAQs
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What is the difference between ESG investing and socially responsible investing?
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This article was written for Business 2 Community by Michael Graw.
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