Social Influencer: A Snapshot of Socially Responsible Investing
Socially Responsible Investing (SRI), the art of balancing potential returns with consideration for the social conscience of the companies with whom money is invested, has gained momentum in today’s investing climate. With steadily growing assets and an increased number of SRI options available, investors have a unique opportunity to enter the market with an investment strategy that aligns with their personal values and can have a positive impact on their communities.
Growing your money and making a positive impact sounds great, but is it a winning investment strategy? Considering some key principles and understanding your risk is a great way to get started.
How You Can Participate in SRI
As an investor, there are two different approaches to participating in SRI – inclusion and exclusion. Inclusion occurs when investors actively seek companies that are making a positive impact in the community, such as participating in clean energy, social justice or environmental sustainability. Once you identify a company with a mission you support, you can add them to your portfolio through stocks, exchange traded funds (ETFs) or mutual funds. The other approach to SRI, referred to as exclusion, is to abstain from investments with companies that have values which conflict with your personal or your organization’s beliefs. Examples may include companies that sell addictive substances or are involved with questionable environmental consciousness.
Risk Involved with SRI
No matter how admirable an organization’s beliefs, they are not absolvent of risk – and neither are you. Investing carries risk, and SRI-compliant investing practices are not always mutually inclusive to market gains. The social consciousness of a company does not directly correlate to its success in the market. As with any investment strategy, it is recommend that you diversify and properly allocate funds. SRI strategies can be purchased through an ETF or a mutual fund. Due to rapid growth in SRI’s span of influence, the number of ETFs and mutual funds containing socially responsible investments is growing. The increased availability of these types of investments has made it possible to build a properly diversified portfolio with SRI principles across a variety of asset classes.
Considerations as Part of an Overall Portfolio
Not-for-profit organizations have historically allocated larger amounts of their portfolios to SRI strategies as compared with for profit organizations of similar size. This is likely because of the nature of their missions and pressure from individual donors, committees or board members. However, as the social structure churns toward results in environmental protections and social justice, SRI has become an increasingly more common practice with for-profit organizations and individual investors. As the undercurrent of change pushes forward, it is expected that there will be continued demand for SRI.
As with any strategy, you should expect SRI strategies to go through periods of underperformance and outperformance. When considering to invest in a socially responsible way, make sure that SRI is part of an overall portfolio that is in line with your risk tolerance and appropriately allocated. This is the best course of action whether you are investing for yourself or selecting investments on behalf of an organization as part of a committee.
For any investment strategy, including SRI, to be successful, you need to create balance between the investment and return. If socially conscious principles are important to you or your organization, consult a financial advisor to learn the appropriate way to incorporate SRI into your portfolio. SRI can be done and done well, but diversification, asset allocation and position sizing are key factors in determining the outcome.
Published on September 11, 2020