There are a number of reasons to start investing: from protecting the value of your money against inflation, to achieving financial independence, to planning ahead for retirement. But what happens when your desire to invest for personal reasons overlaps with a desire to do good for the world at large?
Socially responsible investing marries the financial benefits of traditional investing with the social benefits of philanthropy. Curious to learn more? Read on for a quick guide to socially responsible investing along with a few key tips on how to get started.
The Definition of “Socially Responsible Investing”
There’s no one definition of “socially responsible investing.” For some people, making a socially responsible investment means purchasing shares in a company that produces clean energy. For others, socially responsible investing is about avoiding mutual funds with exposure to any securities tied to weapons or tobacco. Some socially responsible investors may prefer to eschew the traditional stock market altogether, only investing their money in peer to peer investments that support small-scale borrowers around the world.
With those caveats in mind, the widely accepted definition that socially responsible investing means choosing an investment vehicle based not only on traditional metrics such as risk and expected return, but also on what value that investment will return to the world. Socially responsible investors often consider green energy, the gender or racial makeup of a company’s boardroom, or avoidance of “sin industries” like alcohol and tobacco when deciding where to invest.
Risk Versus Return
The question of risk versus return is at the heart of practically every investment decision. While socially responsible investors’ concerns transcend profits alone, it’s still important to understand what impact an investment of any kind will make on your finances.
Many people may be surprised to learn that according to various studies, socially responsible investments perform on-par or better than traditional investments. At the same time, every investment comes with risk. It’s important to do your research and understand the fine print before making any kind of investing decision. At a minimum, decide how much money you’re able to invest, determine a timeline for investing, and list out a few goals—whether that’s saving a certain amount by retirement age, or simply earning a higher interest rate on savings for a few years.
Which Investment Vehicle Is Best?
If you’re interested in becoming a socially responsible investor, there are myriad ways to go about it. Here are a few common investment vehicles and strategies to consider.
- Mutual Funds: Nowadays, you can choose from a wide range of mutual funds that offer diverse exposure to ESG securities. The term ESG, which stands for Environmental, Social, and Governance, indicates that the fund will only invest in organizations that commit to certain ethical or environmental frameworks. Each mutual fund is different, so review a fund’s prospectus to see what socially responsible aspects are prioritized.
- Stocks: If you know of a business doing socially responsible work, it may be possible to invest solely in that company by purchasing shares of its stock. Do keep in mind that experts usually recommend diversifying your exposure to the market by not parking all investment funds in a single stock. It’s also important to remember that when it comes to stocks, long-term investments tend to pay off the most.
- Bonds and CDs: On the other hand, if short-term investing is a priority, there are socially responsible bonds and CDs. Both bonds and CDs (certificates of deposit) are short-term investment vehicles that offer a fixed interest rate over a period of time. ESG bonds put money toward ethical or sustainable projects, while CDs may be available which support a financial institution to up its positive impact.
- Peer to Peer Investing: An increasingly popular form of ethical investing is peer to peer lending, in which investors use their funds to support the projects of borrowers with fewer opportunities in the traditional financial market. There are a number of peer to peer platforms that connect lenders and borrowers, each offering its own approach to questions of risk and return for the investor.
- DIY: Investors who prefer to do their own research and purchasing of financial assets will find plenty of DIY options for socially responsible investing. Online brokerages and investment apps can direct users to diversified portfolio options that either include a few socially responsible vehicles, or are entirely composed of investments that promise to make a positive impact.
- Professional Advice: On the other hand, a professional financial advisor can help investors to develop a socially responsible strategy that also addresses your overall financial goals. Be sure to choose a fiduciary advisor: in other words, someone who is legally mandated to make recommendations for the benefit of you and your finances, rather than their own interests.