From pollution in the oceans, to employees’ working conditions, to climate change, consumers today care deeply about how corporations behave. Increasingly, investors want their dollars to reflect their ethics and values. This has given rise to a fast-growing movement called Socially Responsible Investing.

Socially responsible Investing considers both financial returns and social good. Also called sustainable investing or ethical investing, it aims to incentivize corporations to act more responsibly while providing investors with peace of mind.

Curious how it works and if it’s right for you? Read on for a deep dive into socially responsible investing.

What is Socially Responsible Investing?

Socially responsible investing is an investment strategy that weighs both financial returns and social impact. It involves making investment decisions based not only on financial factors like risk and return potential, but also on how companies perform on environmental, social, and governance (ESG) issues.

The ESG factors considered typically include:

• Environmental – Issues like climate change policies, pollution, wildlife conservation
• Social – Issues like employee wellbeing, diversity and inclusion, product safety
• Governance – Issues like executive pay, political contributions, board structure

Investors who practice socially responsible investing aim to incentivize companies to act more sustainably and responsibly. They want their money to not only grow but to also have a positive impact on the world.

This approach is sometimes called sustainable investing, impact investing, ethical investing, or ESG investing. But whatever term you use, the concept is the same: Considering social responsibility alongside financial factors.

A Brief History of Socially Responsible Investing

The roots of socially responsible investing trace back centuries in some regards. Religious groups like Quakers and Methodists have avoided profiting from tobacco, gambling, and weapons companies since the 1700s.

In the 1960s, some investors began protesting the Vietnam War and avoiding war-related investments. Socially responsible investing started garnering more widespread attention and assets during the cultural movements of that decade.

Growth further accelerated in the 1980s and 90s amid rising environmental concerns. Major events like the Exxon Valdez oil spill highlighted the social and ecological consequences that companies’ actions could have. And consumers began demanding more corporate responsibility.

Today, ESG investing has exploded in popularity, with over $30 trillion in socially responsible assets under management globally. What started as a niche movement has rapidly gone mainstream.

Why the Surge in Popularity?

Many factors have fueled the recent dramatic growth in sustainable investing. Increased transparency around corporations’ ESG practices has enabled more informed decision-making. Data and ratings around companies’ sustainability have also improved.

But the biggest driver seems to be consumer demand. Individual investors, financial advisors, and institutions like pension funds want to align investments with their values. 71% of individual investors now express interest in sustainable investing, according to Morgan Stanley.

Younger investors especially prioritize effecting social change with their dollars. 67% of millennials believe their investments can influence climate change, per a survey by Swell. And women are statistically more likely to invest in companies with good ESG performance.

In essence, sustainable investing has skyrocketed because today’s investors seek profits and purpose.

Does It Sacrifice Returns? Myth vs. Reality

“Investing in ESG just sacrifices returns.” This is a stubborn criticism facing the socially responsible investing space. But data increasingly shows it to be a myth not grounded in reality.

Numerous studies demonstrate that companies with high ESG scores tend to provide market or above-market returns over time. The idea that investors must choose between profits and principles is outdated.

For example, a 2015 meta-study by Oxford University looked at over 200 sources. It found that 90% of studies show no negative relationship between ESG and corporate financial performance. Around half demonstrate a positive correlation between strong sustainability practices and strong financial performance.

This busts the antiquated notion that pursuing social good comes at the cost of returns. As it turns out, operating sustainably, ethically, and responsibly is often good business. It can reduce risks, boost brand reputation, improve recruitment, and spark innovation.

Strategies for Socially Responsible Investing

Socially responsible investors use a variety of strategies to align finances with values. Common approaches include:

ESG Integration

This involves systematically including ESG criteria in financial analysis and investment decisions alongside traditional metrics. Assessing risks and opportunities related to issues like climate, human capital, and governance provides a more comprehensive view of investment.

Negative Screening

With this strategy, investors exclude companies involved in activities they deem objectionable or unethical. Common category exclusions include tobacco, weapons, fossil fuels, adult entertainment, and gambling.

Positive Screening

Rather than excluding investments, positive screening actively identifies companies that lead their peer group in ESG performance. Investors intentionally invest in corporations that rank well on sustainability.

Impact Investing

Impact investors actively target companies and funds poised to deliver tangible social or environmental benefits alongside financial gains. The focus is on measurable real-world impact.

Shareholder Advocacy

Shareholder advocacy leverages the power investors have as company owners to push for change from within. Tactics like filing resolutions and direct engagement spur improvements in ESG policies and practices.

Top Sectors for ESG Investors

While ESG principles can be applied across all asset classes, some sectors may be especially appealing for those seeking maximum social responsibility:

Renewable Energy – Companies producing clean energy help mitigate climate change and pollution. This sector is popular given the urgency of transitioning from fossil fuels.

Sustainable Tech – Tech firms focused on efficiency, automation, AI ethics, and reducing waste can enable major sustainability gains.

Healthcare – Biotech and pharma companies saving lives provide inherent social value. ESG investors may screen out those engaged in egregious price gouging.

Education – Companies expanding access to affordable, quality education promote social mobility and progress.

Responsible Finance – Banks committed to ethical lending and minimizing systemic risk appeal to ESG investors.

Things to Consider Before Investing in Impact

The rise of sustainable investing is undoubtedly a positive trend. But before adding ESG criteria to your investment process, some factors to keep in mind:

• Do your financial goals, time horizon, and risk tolerance still align with socially responsible investing? Don’t jeopardize your core requirements.
• Research which ESG issues matter most to you personally, then invest accordingly. Ranking firms on every metric is less crucial than matching your capital with your convictions.
• Remember that even companies with solid ESG ratings may have controversies or downsides. Diversification and reasonable expectations still apply.
• Pay attention to greenwashing claims or invalid reporting. Standards around sustainability disclosures are evolving and inconsistent.
• Be wary of overpaying for investments just for reputational associations. Don’t abandon prudent valuation methods.
• Keep costs associated with specialized funds or advisors reasonable. The impact shouldn’t come at the expense of sound investing practices.

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Socially Responsible Investing – Conclusion

Seeking both social good and financial returns no longer requires sacrifice. Data shows companies performing well on material ESG issues can achieve market or above-market returns over time.

An array of strategies now exist for aligning investments with ethics and values. Whether through screening out objectionable activities, targeting solutions-oriented companies, or pushing for change as an active owner, investors have options.

The bottom line? More and more people agree the days of amoral investing are over. Investors need not, and should not, check their conscience at the door.

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