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How (and Why) Do Investors Pursue Socially-Responsible Investing?

How (and Why) Do Investors Pursue Socially-Responsible Investing?

March 03, 2020

With the U.S. bull market entering its eleventh year,1 more investors are looking for the next new thing. For many, this can mean investing in companies that not only are financially profitable, but that also help provide for the general good. Socially-responsible investing, or SRI, focuses on investing in companies and products that are committed to sustainability, alternative technology, clean energy, and worker protections.

In 2013, nearly one-third of Millennials reported that they consider socially-responsible factors when choosing a new investment, and this figure likely has only grown since then.2 Learn why these investments appeal to so many modern investors. 

What Motivates Socially-Responsible Investing?

Socially-responsible investing was once known as "ESG" investing, an acronym for Environmental, Social, and Governance. Although SRI and ESG investing aren't exactly the same thing, many SRI companies and investments still fit within one of the three ESG categories. 

  • Environmental investments mostly focus on companies committed to sustainability, waste recycling, reducing energy and water usage, and diminishing pollution.
  • Socially-conscious investments are committed to worker rights, unionization, consumer rights, and gender, racial, and sexual equality.
  • Governance investments focus on the way these companies are run, seeking out companies with a tangible commitment to business ethics, transparency, and fair executive pay.

Often, SRI companies are classified as such not because of what they do, but because of what they don't do—clothing and apparel companies that refuse to use overseas child labor, manufacturers that eschew the use of coal-derived energy, or service providers that have eliminated the "tipping" model in exchange for higher hourly pay. The broad scope of SRI products means that these investments can be appealing to a wide range of investors.

Get Started With SRI

Not many investors are willing to sacrifice their investment returns in the name of social good. But SRI investments span the full spectrum of risk and reward, from super-speculative plays in new companies to more stable (and diversified) index funds and ETFs.

There are several ways to include socially-responsible investments in your portfolio. First, you can expand your exposure to multiple companies at once by purchasing shares of a socially-responsible mutual fund or exchange-traded fund (ETF). By purchasing fractional shares or "slices" of a variety of companies, you can reduce your risk of loss if one of these companies fall on hard times. 

You may also consider community investing, a somewhat riskier prospect that can often yield a more tangible reward. In community investing, you (and others) provide direct funding toward an organization that works to improve the quality of the local economy but doesn't necessarily have the type of balance sheet a bank or other lender is looking for. 

As with any investment, it's important to do your due diligence and thoroughly research any prospective funds before diving in. But for investors who want to feel good about the way their investments are growing, adding a few socially-responsible funds to one's portfolio can help work towards this goal.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.


Important Disclosures:

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

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