Socially responsible investing is your chance to make money and make an impact
Ever since I heard Michael Douglas say, “Greed is Good,” in the 1987 movie Wall Street, I have followed an amoral creed of investing. Whether a company was a ‘good corporate citizen’ or not never came into my investment decision.
As I get older and as the world I leave to my son becomes more important, I find myself questioning the idea of separation between investing and social responsibility.
I still want to make a solid return on my money but I like the idea of being able to make a difference in environmental and social standards at the same time. As an equity analyst, I dove into the numbers behind socially responsible investing recently and can genuinely say that I’ve come around to the new strategy.
In fact, I’ve just invested $500 in a group of funds focused on impact investing and socially-responsible companies.
What is Socially Responsible Investing?
Socially responsible investing (SRI) is a strategy that seeks to produce an investment return while also forcing social change. You’re putting your money to work in good investments but also making a statement and supporting companies that promote good social values.
SRI has been known by different names over the years, from Environmental, Social and Governance (ESG) to impact investing and most recently sustainable investing. There’s really no difference in the investing styles between the different strategies.
The idea is that socially responsible investors can incentivize companies to use higher environmental standards, protect human rights and promote diversity through their investment.
SRI investors make their point through avoiding companies that break these socially-responsible rules and by seeking out companies that follow a value system for investment.
A History of Socially Responsible Investing
Socially responsible investing can be traced back as early as the 18th century when John Wesley, founder of Methodism, detailed his investment style to parishioners. He warned investors not to harm their neighbors through business practices and to avoid industries like chemical production and tanning.
Boycotts of socially-irresponsible companies and countries have long been used as a way to force change. The boycott of investment in South African companies through the 70s, 80s and 90s helped to bring attention to and end apartheid. College endowments and trust funds have lately been selling off investments in coal companies, tobacco and firearm manufacturers.
Individual investor interest in socially responsible investing has only taken hold over the last 20 years. Since 2001, the number of mutual funds and exchange traded funds with an SRI-based strategy have grown from 167 to 415 reported in 2014.
Most recently some websites like Swell Investing have been created to automate impact investing. Swell offers investors a choice of six portfolios, each with a different impact goal like disease eradication, renewable energy, and healthy living. Investors pay a low annual fee of 0.75% but pay no fees for investing in the diversified funds.
Socially Responsible Investment Returns
Returns on socially responsible investing are hotly debated and the question isn’t easily solved because there’s no clear definition of what stocks should be in an SRI portfolio. Most of the funds for impact investing and SRI have been around for less than a decade.
We can use the iShares MSCI KLD 400 Social ETF (DSI) as a benchmark for social investing. The fund has returned 6.87% annually over the last decade, lagging the 7.64% annual return on the S&P 500 over the same period. The SRI fund has beaten the S&P over the last year with a 17.1% return versus 15.9% for the broader market.
Can a socially responsible investor beat the larger market? Is there some value in the ability to impact Wall Street with your investment?
Some investors would say that socially- and environmentally-responsible companies should produce better investment returns from a variety of factors. They say these companies should have stronger community support, worker loyalty and fewer legal risks.
Even if the SRI investor doesn’t ‘beat’ the return on the overall stock market, should it matter? If you are able to meet the return needed to reach your financial goals and make an impact with your investment at the same time, isn’t that enough?
Whether they lag a little or ‘beat’ the market, investment returns on a diversified portfolio of socially-responsible companies should be very close to the returns in the overall market. Your SRI investments might have fewer stocks from the energy and utilities sectors but will still hold a diverse selection of stocks in the other 11 sectors of the economy.
Below is a comparison of the sector weightings in the iShares Social ETF with the weightings in the broader S&P 500.
Investing in socially responsible companies doesn’t have to mean you only invest in a few sectors. It doesn’t even mean you have to avoid some sectors completely. Notice that the SRI fund holds less of its investment in energy companies but it still holds some money in the group.
It’s important when you’re putting together your own portfolio of environmental, social and governance companies that you look for stocks in different sectors to help spread your risk around.
How to Invest in SRI Stocks
Investing in SRI stocks is a process of finding companies to avoid and others to include in your portfolio.
- Negative screening is the process of avoiding companies that should not be in an environmentally- or socially-conscious investment portfolio. This would include companies in the tobacco, gambling, firearms, defense or alcohol industries. You might also exclude companies that test their products on animals and those that create a significant environmental impact.
- Positive screening is the process of finding companies that should be in an SRI portfolio. These are companies that set good examples through their environmental, social and governance standards. These companies promote diversity and equal opportunity in their workforce and support community programs.
Running these positive and negative screens is a tough process because there are few tools available on the internet that do the work for you. Some of the factors, i.e. being a good social steward, are hard to define so make it difficult to screen for stocks.
Probably the easiest way to find socially responsible companies is to look at some of the exchange traded funds (ETFs) and mutual funds in the theme. You can start with a list of the stocks in these funds and then narrow the list by companies you think should be included in an SRI portfolio.
Picking stocks for a socially-responsible portfolio is more than just finding companies that don’t pollute or that promote good social values. Great environmental stewardship isn’t a pass for a lousy company!
Once you’ve found companies in each sector that pass your positive and negative screens, you can narrow your list with fundamental analysis including price-to-earnings, debt ratios and growth.
How to Use Swell Investing for Impact Investing
While ETFs investing in socially responsible companies have been around for a couple of decades, most funds invest very broadly. Looking at the investments held in the iShares Social Fund, it isn’t clear how it is any different from the S&P 500.
Swell Investing was created to give investors a more focused approach to impact investing and to target specific themes in SRI.
The website offers investors a choice between six different funds, each holding dozens of companies within an impact theme (Renewable Energy, Disease Eradication, Healthy Living, Clean Water, Zero Waste, Green Technology).
Besides the idea of impact investing, I think a lot of these companies are leading innovation in their respective fields and could be great long-term investments. I opened an account with Swell Investing and divided my $500 investment across the six portfolios.
You don’t have to invest in all of the funds and can control exactly how much you invest in each. I divided up my initial investment equally just to see how each did but I’ll probably focus on a few of the funds with more money later.
One of the best benefits of Swell Investing, besides being able to invest in socially responsible companies without having to do all the research yourself, is the low-cost. Investors pay a 0.75% all-inclusive fee on their total investment. There are no trading fees, no expense ratios and no pricing tiers.
I’ll pay an annual fee of $3.75 on my $500 investment for exposure to 382 stocks held in the six funds. That’s hard to beat on any other investing site or ETF. For example, the iShares Social ETF charges an annual fee of 0.50% on your investment plus you have to pay trading fees each time you buy shares.
I just started investing on Swell Investing so don’t have much in the way of returns but the track record for the funds is good. The six funds have averaged a return of 15.95% over the last year compared to a 15.23% return on the S&P 500. I’ll update the blog with my returns and more detail in the future.
Socially responsible investing isn’t just for hippies and large university endowments anymore. SRI investing has gone main stream and is a great way to push for social responsibility and justice from our corporate peers. While doing the investing yourself can be tedious, ETFs and impact investing websites have made it easy to pick a portfolio of stocks.