A Guide to Socially Responsible Investing

In the U.S., assets invested in the socially responsible investing universe have grown exponentially since 1995, according to the US SIF Foundation, a leading authority in this space.¹ The foundation notes that nearly 500 institutional owners hold $6.6 trillion in assets representing ESG standards.¹ Clearly, publicly traded companies, fund managers, and investors of all generations are taking notice of the profitability of using ESG standards to invest. And maybe that is exactly the point.

Most socially responsible investments have similar financial success as the broader markets, despite a common belief that earnings must be sacrificed to “do good.” In fact, S&P Global gives ESG scores to companies, offering in-depth data on the factors contributing to these scores as well.²  What’s more, the S&P 500 ESG has steadily outperformed the S&P 500 index since 2021³. In other words, these organizations are successful and meet socially responsible investing standards.

There are a few ways to go about socially responsible investing. Many different approaches can be done by individual investors and professional managers alike, including:

• ESG funds
• Negative screening
• Positive investing
• Impact investing
• Community development investing

I’ll provide an overview of these approaches so you can determine which, if any, make sense for you.

ESG funds are portfolios of stocks and/or bonds from companies that have met certain ESG criteria. Often, these exchange-traded-funds (ETFs) are built in a way that mirrors the makeup of popular indices like the S&P 500, making them diversified and easy to buy. Sometimes, these funds will exclude stocks of certain industries considered to score low in terms of ESG criteria, such as tobacco companies, firearms manufacturers, and non-sustainable food producers.⁴

When picking companies in an ESG fund, ESG factors do not take the place of analyzing typical financial metrics. Instead, they’re considered as an additional filter. In response to investor demand for information about whether a company meets ESG standards, 99% of S&P 500 companies now disclose ESG information.³ Research firms often use this information to create ESG scores and ratings that help investment managers decide which companies to include in an ESG fund.⁵ According to CFA Institute, typical ESG factors include⁶:

• Environmental: Impact on climate change, natural resource management, pollution, waste and recycling policies, and relationships with “green” agencies, such as the federal Environmental Protection Agency (EPA) or the New York State Department of Environmental Conservation (NYSDEC). Companies that have been fined, sanctioned, or otherwise investigated by such agencies may be more likely to have lower ESG scores than companies that haven’t.
• Social: Product liability, employee health and training, labor relations, employee turnover, customer service and satisfaction, employee inclusion/diversity, ethical sourcing of materials.
• Governance: Board and management diversity, tax transparency, management stability, corporate communications, classes of stock, executive compensation metrics.

Socially responsible investing is often thought of in terms of negative screening — the exclusion of industry categories that an investor deems unappealing. This is a straightforward approach, often used by individual investors when we pick our own stocks. Negative screening is highly personal, although certain organizations like the United Nations have offered various frameworks to help others determine both the positive and negative impact that industries have on our world.
 

Common examples of negative screening include the “sin stocks”: tobacco, alcohol, and weapons. Other examples include animal cruelty, gambling, defense contractors, fossil fuel producers, and chemical companies.⁷

The positive investing approach to socially responsible investing is when you purposely select investments that align with ideals you want to support, kind of the mirror image to negative screening. The idea is that by specifically supporting certain companies, you will be directly helping them contribute to the well-being of society through their operations.⁸

Past beneficiaries of positive investing included companies dedicated to civil rights, women’s rights, or anti-war efforts. Today, investors can focus on principles like fair trade, green transport, organic food, and poverty. Portfolio managers of ESG ETFs tend to utilize both negative screening and positive investing.⁹

The goal of impact investing is to help address some of the world’s most pressing challenges, even if earnings take a back seat. The Global Impact Investing Network (GIIN), a nonprofit organization, defines impact investing as “investments made with the intention to generative positive, measurable social and environmental impact alongside a financial return.”⁶

Impact investments are made in both emerging and developed markets and in various ways, like stock investments, venture capital, debt financing, and private equity. According to GIIN, four characteristics of impact investing are:⁷

• It’s intentional: You invest with the conscious intent to make a positive impact.
• Returns are expected: Unlike charitable giving, you expect that money invested will earn a return or at least be preserved.
• Wide range of returns: Different from traditional investing, you accept a wide range of earnings, from concessionary (below market) to market rates. Most impact investors look for competitive returns.
• Impact measurement: You measure success on more than just financial returns. Key aspects for impact investors are accountability and progress toward social goals.

Individual investors tend to get involved in community investing. For example, they may choose to fund any of the Community Development Financial Institutions in the U.S., whose mission is to provide fair and transparent financing to small businesses who are disadvantaged at mainstream banks. This can include investing through community banks, credit unions, fixed-income investments, and private equity investments.¹⁰

Most community investing aims to assist low-income and underserved communities. In addition to investments that provide funding and/or access to credit, community investing can help finance services like education, childcare, food access, affordable housing, job creation, and infrastructure development. Often, investments from individuals are mixed with public funds to accomplish these goals.¹¹