Socially Responsible Investing (SRI)

May 21st, 2019

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In general, the goal of investing is to protect your money from inflation and to grow it for the future. But some people want their money to do even more, which is where socially responsible investing comes in.
 

So what exactly is socially responsible investing?

The aim of socially responsible investing (SRI), also known as sustainable, ethical, or socially conscious investing, is to consider the social and environmental impact of your investments as well as the financial return.
 
The specific objectives and methods used by SRI firms and funds can vary. Some simply focus on avoiding investments in companies considered harmful to society, like tobacco or gambling, while others do this but also actively seek out companies that promote socially desirable outcomes, often relating to human rights, consumer protection, and environmental welfare.
 
Impact Investing: The term impact investing is reserved for a specific category of socially responsible investing. The goal is to invest only in companies and organizations with explicit social or environmental objectives, like renewable energy, energy efficiency, waste reduction, education, clean water, health and wellness, and others.
 

How do you do it?

If you’re interested in doing some socially responsible investing, there are a few different ways you can.
 
There are a number of SRI mutual funds and exchange traded funds managed by traditional asset management firms that you can buy through your brokerage account.
 
Doing a quick online search will show a range of funds to choose from. But keep in mind, what one person considers socially responsible might not be the same for others. So pay attention to the fund’s criteria for selecting investments. And as always, pay attention to the management fees.
 
Alternatively, some robo-advisors also support socially responsible investing.
 
Robo-advisors use computer algorithms to manage your investments for you, selecting what to hold and automatically rebalancing your portfolio over time. Some of them actually specialize in socially responsible investing, while others offer an SRI option in addition to their standard offerings. Here are brief overviews of two popular ones for example.
 

Betterment

Betterment is currently the largest independent robo-advisors in the market, with over $16 billion in assets under management as of April 2019. Their core business is not focused on socially responsible investing, but they do offer that as an option. They manage their SRI portfolios similar to how they manage their conventional portfolios, but they increase their allocation weights to socially responsible companies to the extent possible (and a portion of your portfolio will not be invested in SRI assets because of a lack of acceptable SRI investments).
 
Key stats

• No minimum requirement to get started

• Annual management fee of 0.25% for their basic digital plan (and they don’t charge extra for their SRI option)
 
► Learn more about investing with Betterment
 

Wealthsimple

Wealthsimple is based in Canada, but they’re available to U.S. customers as well. Similar to most other robo-advisors, Wealthsimple manages your money by investing in low cost exchange traded funds, or ETFs. For their SRI portfolio, they’ll invest your money in six ETFs, each targeting a specific sector; low carbon, cleantech, socially responsibility, gender diversity, local initiatives, and affordable housing. The exact portfolio mix will depend on your risk tolerance.
 
Key stats

• No minimum requirement to get started

• Annual management fee of 0.5% if you invest $100,000 or less and 0.4% if you invest more than $100,000
 
► Learn more about investing with Wealthsimple
 

Is there a downside to these strategies?

By definition, with socially responsible investing, your investment opportunities will be more limited than they would be with conventional investing. And in theory, this means your investment returns may be lower, particularly with impact investing, where your investment opportunities will be the most limited.
 
However, it’s impossible to know exactly how a particular investment or a certain fund will perform in the future. And it’s certainly possible that a socially responsible investment strategy could do as well or better than conventional investing strategies. But, generally speaking, more constraints on your investment choices tend to result in lower financial returns.
 
So if you’re on the fence, you could consider setting aside a portion of your money for SRI or impact investing and then invest the remainder in more conventional investment strategies. And of course you could choose to invest your money more generally and then make donations to your favorite social causes, keeping that separate from your investments.
 

Summary

Overall, socially responsible investing can be a great choice for some people who want to support particular causes with their money. But it’s important to check the investment criteria before investing with a particular fund or robo-advisor and keep in mind your returns may be lower than with conventional investing.
 

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