As an investor, you have many options to manage your money and grow your savings — but how do you decide what’s best for you?
The way you invest directly reflects your values and principles, so you must think through which investments align with your long-term goals and values. Working actively to incorporate these principles into your investments is known as socially conscious investing.
What Is Socially Conscious Investing
Socially conscious investing is also known as responsible, impact or responsible investment and it has become a popular way for investors to address the world’s most challenging problems while still growing their portfolios.
Instead of simply avoiding companies that you find offensive or unethical, socially responsible investing allows you to support the businesses you feel are making positive contributions to society.
So, if you are concerned about climate change, human rights, animal welfare or other social issues, you can use these strategies to take a stand and support causes they believe in.
Here are five things you should know about socially responsible investing.
1. How Socially Conscious Investing Works
Socially conscious investing means buying stocks in companies that you believe are doing good in the world. So, instead of looking at the profitability of a company, you are trying to see how it is making a difference.
For example, if you wanted to invest in a socially conscious fashion, you might buy shares of Apple instead of Microsoft. This is because although Microsoft is a profitable company, Apple is making a much larger positive impact in the world through its philanthropic efforts and its focus on green energy.
2. Types of Socially Conscious Investing Strategies
According to a report by the Global Sustainable Investment Alliance (GSIA), assets managed with an emphasis on responsible investing grew from $12 billion in 2007 to $21 billion in 2014, representing 0.5% of the global investable assets in responsible investing and impact investing combined.
This goes to show that socially conscious investing is a growing trend that is here to stay as more and more people are interested in finding new ways to make their money work for good.
Now, there are many types of socially conscious investing strategies. Broadly speaking, they come in two categories:
- Selective Investing: Avoiding industries and companies that harm the environment or violate human rights. You can do this on your own or with the help of a financial advisor who specializes in socially responsible investing.
- Screening Investing: Using a standardized methodology to evaluate companies based on factors such as their environmental and social track record, their leadership, and their business model.
3. What to Keep an Eye Out for in the Socially Conscious Investment Space
There are many ways to invest responsibly nowadays. Each strategy has its pros and cons, so it is important to understand the trade-offs before making any decisions.
Some are as simple as selecting funds that avoid certain industries or companies. Others involve screening companies based on certain values you consider important.
Nonetheless, there are three main types of funds that are considered socially responsible investing:
Value funds invest in companies that have strong financial fundamentals. They avoid companies that produce harmful chemicals, pollute the environment, or violate human rights.
Responsible Equity Funds
Responsible equity funds invest in companies that have good social and environmental records. They can be a good choice if you want to invest in companies that treat their employees well but don’t have a strong financial track record.
Impact funds are actively managed funds that invest in companies that are solving big problems for society and the environment.
4. How to Choose Socially Responsible Investments
If you are interested in socially conscious investing, you need to decide what issues are most important to you. This can help you decide which companies you want to invest in.
Once you’ve identified the issues you care about, you can look for companies that are working on these problems in several ways.
For example, if you care about human rights, you may want to invest in companies that are not doing business in countries with poor human rights records.
You can also look for companies that are actively working to solve problems. So, if you are concerned about the environment, you may want to invest in companies that are making large efforts to reduce their carbon footprint.
5. Limitations of Socially Conscious Investing
As much as the efforts are being directed toward the right place, being socially responsible is not without its challenges, especially when you consider how interconnected and interdependent the global economy is.
There are some socially responsible funds that screen out even large companies with poor records on climate change and human rights violations. While this may make sense for an individual investor, it can be difficult for these funds to grow sufficiently large to meet their investment objectives.
Another challenge of socially responsible investment is the difficulty in getting accurate information. Most companies provide data on their own environmental and social performance, but this information is often incomplete and unreliable. This is often referred to as the “data gap” – a gap between the data that is available and what is needed to make informed investment decisions.
Furthermore, socially conscious investing is not a guaranteed path to success. While there is some evidence that socially responsible investments may offer better long-term returns, there is no guarantee that they will do better than other investments. Moreover, socially conscious investing is not for everybody.
The Final Words
As you can see, socially conscious investing is more than just checking a box. It’s about aligning your investments with your values, not just for the sake of doing good but also because it makes financial sense
With that said, social and environmental issues are not temporary problems that will eventually go away. There will always be new challenges and opportunities to address these issues so socially responsible investing is not a one-time decision. Rather, it is a continuous process of monitoring the world for new problems and opportunities and staying on top of the performance of your investments.