Socially responsible investing funds or SRI funds are a way to grow your investment portfolio while doing something for the greater good. For example, you might invest in funds that advance social causes, encourage better corporate governance or promote a healthier, cleaner environment. In short, socially responsible funds allow you to make a positive difference in the world while enjoying the financial benefits of fund investing. If you’re looking for a way to branch out your investments and support your favorite causes, SRI funds can help meet both of those needs.
A financial advisor can help you create a financial plan for your socially responsible investing needs.
What Is Socially Responsible Investing?
A socially responsible investing strategy is one that has two goals: making a positive social impact and generating financial returns. This investment strategy is also referred to as impact, sustainable, green or ESG investing, which stands for environmental, social and governance.
Regardless of the label that’s used, the aim of SRI funds and impact investments is to leverage your portfolio to do good. While investors do want to enjoy some financial gain, either through capital appreciation of the funds they own or dividends, the primary focus is on supporting companies that align with your goals and values.
How Do SRI Funds Work?
Every socially responsible investing fund is different, in terms of what it invests in. The key difference tends to be in how investments for the fund are chosen. Some SRI funds use an inclusionary strategy, while others are exclusionary.
So what does that mean? A socially responsible fund that’s inclusive takes the approach of including stocks or other investments that meet a specific profile. So an environmental SRI fund, for example, might include companies that rely on green energy or produce green building materials.
A socially responsible fund that is exclusive screens out investments and industries that conflict with its goals. So if an SRI fund is committed to social causes or social justice, for instance, it might exclude shares or bonds of gun manufacturers and tobacco companies.
In terms of funds that use an ESG approach, the goal is to choose companies that align with one, two or all three of those criteria. That includes companies that are committed to environmental sustainability, advancing equality and operating in a transparent manner that is responsive to shareholders. For example, you might choose to invest in funds that hold companies that advance social projects in underserved communities, such as access to schools or healthcare. Or you might want to back companies that are committed to the equal advancement of women and minorities.
Advantages of Investing in SRI Funds
SRI funds can be profitable, but the real reason to consider them for your investment portfolio may be your desire to give back. If there’s a specific cause you’re concerned about then socially responsible investing is a way to be more intentional with your money. You can actively choose not to support companies that contribute to climate change, for example, while investing money in ones that are developing innovative green technology or taking other steps to reduce their carbon footprint.
When you’re investing in traditional mutual funds, index funds or ETFs that don’t have an SRI focus, you’re essentially getting a mixed bag. While you might find that a fund includes some of the companies you support, it could just as easily hold companies that conflict with your values. For instance, you might own an oil company alongside a company that manufactures solar panels.
By choosing to invest specifically in SRI funds, you can ensure that your money goes where you want it to. At the same time, you can also diversify your portfolio beyond the more traditional investment options you might already own. Diversification is a good thing from a risk and performance perspective. The more varied your investments, the better positioned you are to manage risk during periods of volatility. And a mix of different investments can also help with balancing out returns if some of your assets experience a downturn.
Disadvantages of Investing in SRI Funds
While socially responsible investing has its positives, there are some drawbacks to consider.
First, it’s important to make sure you’re doing your research when comparing SRI funds. Any company can claim to be green, but it’s important that you do your own homework to make sure a company is walking the walk.
Second, performance isn’t guaranteed with SRI funds. While that’s true of any mutual fund or investment, socially responsible funds are a little different because the focus is on practicing good ethics and not exclusively on profits. That can make it more difficult for them to keep pace with the performance of non-SRI funds.
As an example, between January 2018, and January 2023, the SPDR S&P 500 ETF Trust (SPY) rose 39.50%. During the same period, the SPDR SSGA Gender Diversity Index ETF (SHE) rose 7.45%, and the iShares MSCI ACWI Low Carbon Target ETF (CRBN) rose 17.14%.
Third, you may miss opportunities to invest in good companies if you have tunnel vision with SRI funds. If you’re only looking for funds that have the sustainable, impact, values-based or SRI labels, you could be overlooking funds that still meet your criteria for investing. Again, this is why it’s important to take a closer look at the underlying investments of any mutual fund so you know exactly what it is you’ll own if you decide to purchase shares.
How to Choose Socially Responsible Investing Funds
If you’re thinking that SRI funds could be a good fit, think about exactly what causes you want to support before you invest. You might be more interested in protecting the environment than good corporate governance, for example. Or you may want to focus on social impact first and environmental impact second.
Whatever the case, it’s important to know what your values are so you can find funds that match those values. And of course, review the fundamentals of any SRI fund you’re considering. That includes things like the fund’s performance, the expense ratio you’ll pay to own it, whether it pays dividends and the dividend yield, the fund’s risk profile and whether the fund uses an active or passive management strategy.
From there, you can select SRI funds to invest in through your online brokerage account or individual retirement account. Be familiar with the minimum investment required to own shares and decide how much of your portfolio you’re comfortable committing to socially responsible investing.
A chartered SRI counselor can help you compare different SRI funds to determine which ones are best suited to your investment plans.
While many investors look forward to a future day when they have acquired enough wealth to philanthropically support various social or environmental initiatives, socially responsible investing funds can enable them to do both at the same time: do good while they do well. SRI funds can help you to create a legacy that’s more than just financial by connecting with companies who value the same things you do. It’s an option worth considering if you’re ready to expand your investment horizons.
Tips for Investing
- Consider talking to a financial advisor about the pros and cons of socially responsible investing. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Keep tax efficiency in mind when you’re investing in SRI funds. Mutual funds tend to create a lot of capital gains for clients, while ETFs don’t. Depending on the state you live in, capital gains could be taxed at a fairly high rate, meaning that mutual funds may be creating a tax burden that ETFs won’t. Mutual fund investors also typically pay taxes for the turnover within the fund, since other parties buying or selling shares directly affect the size of the fund.
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