There’s power in your dollar. How you spend your money shapes the future of businesses, products, and trends. And it’s the reason more people are moving toward investing in causes they believe in.
Socially responsible investing, or SRI, is growing in America. As of 2020, $17.1T worth of investments are SRIs — a $5.1T increase from 2018.
But how do you choose the best socially responsible investments? And is it really worth pouring your hard-earned cash into?
Continue reading to learn what SRIs are, why they’re growing, and where to find investment options that align with your beliefs.
What is socially responsible investing?
Socially responsible investing is an investment strategy that revolves around investing in businesses making positive social change. The idea is to select investments based on your values, not financial returns (as with traditional investments).
For example, you may invest in a restaurant that donates leftover food to people experiencing homelessness, or a company that sponsors scholarships for low-income students.
Although ethical investing is growing, it’s not entirely new. Socially responsible investing first grew in popularity during the 1960s and 1970s during the racial equality, women’s rights, and antiwar movements. Its origins had a faith-based ideology — do no harm — which later transformed into social justice issues.
Today, it’s further evolved to include environmental, social, and governance (ESG). The terms “SRI” and “ESG” are sometimes used interchangeably. However, one focuses solely on social issues like human rights and forced labor (SRI), while the other includes matters like climate change and gun control (ESG).
For example, an SRI investor may choose to invest in a clothing brand that funds scholarships for underprivileged youth, even if its operations aren’t eco-friendly. SRI investors may also put money in ESG funds, since they include socially responsible companies.
However, an ESG investor may not invest in a clothing brand unless it’s both socially responsible and eco-friendly.
Why socially responsible investing?
Unlike traditional philanthropy, SRI empowers investors to fund a cause and help it succeed, but also offers a financial incentive. Sure, money may not be the primary driver of the investment, but it's a kickback that’s doubly rewarding.
If you’re a company, investing your profits responsibly can build your reputation as an ethical brand. In turn, this may help build visibility, trust, and customer loyalty. Furthermore, you can use a portion of the company profits to fund social causes, making your business an attractive option for SRI investors.
Either way, social investing must be genuine, or it’ll have the opposite effect on your company — a tarnished image. So invest in causes that align with your brand and stick to them. Otherwise, you’ll appear flaky and unauthentic.
Types of socially responsible investing
There are several ways to invest in socially responsible causes, aside from funding a business directly. Here’s an overview of each.
Mutual funds and ETFs
Not sure which company you want to invest in? Consider mutual funds and exchange-traded funds (ETFs) that focus on socially responsible investing. Money managers operate these funds, which include stocks, bonds, and commodities. The managers make investments on your behalf based on specific criteria. For instance, they might invest in companies that donate to domestic violence funds, support education, or fight poverty.
The difference between mutual funds and ETFs is that the latter can be bought and sold on a stock exchange like a regular stock.
You can use resources like As You Sow to look up various funds and analyze their social and environmental impact.
Community investments
Another option is to support organizations that offer financial assistance to people in need. For instance, you can invest in agency bonds from government agencies such as Ginnie Mae or Fannie Mae that provide affordable housing to people. You could also open accounts at banks or credit unions that lend to low-income areas.
If you want to cut out the middleman, you can purchase real estate in impoverished communities and set reasonable rents for low-income families, or fund day care expansions in low-income communities.
Microloans
Microloans, or micro-credit, is a program some financial institutions offer to underserved or disadvantaged entrepreneurs. They come in lower lump sums and with lower interest rates, making them more affordable than traditional loans.
You can find these available in the US and other countries.
Some organizations that finance small-business owners in underdeveloped countries include:
- Zidisha: A global crowdfunding platform that connects you with people who need funds for various projects.
- Kiva: A platform that allows you to crowdfund projects and businesses across the world.
- Women’s Microfinance Initiative: Offers a loan program to foster economic development for businesswomen in rural areas.
- Building Resources Across Communities: Invests in socially responsible companies that aid in causes like poverty, disease, illiteracy, and social injustice.
Socially responsible investing companies
If you’re looking for socially responsible investments, there are several options in the US:
- Community Reinvestment Fund, USA: Partners with local private lenders to finance community development projects (e.g., charter schools, day cares, health care centers) and small-business loans.
- Ellevest: An investment platform designed by women for women (but men and nonbinary people can sign up). It uses an algorithm that considers common realities for women — such as pay gaps, career breaks, and longer average life expectancies — when building an investment plan.
- OpenInvest: Helps SRI investors find companies, sectors, and businesses that align with their values (e.g., reducing greenhouse gas emissions, racial injustice, etc.).
Want to help socially conscious online businesses succeed? Consider Spread Great Ideas, a digital marketing fund that invests money in socially responsible ecommerce companies, and helps them scale marketing strategies.
“I started socially responsible investing with Spread Great Ideas, which I used to begin investing in digital brands and projects that advance causes near and dear to my heart,” says Brian David Crane, founder of CallerSmart. “I’ve been fortunate enough to see these brands develop into multimillion dollar businesses in their own right. But the biggest reward is the personal satisfaction in supporting causes I stand for that can benefit others and society.”
You’re ready to invest ethically — where should you begin? No one knows your values better than you do, so start there.
Identify the matters you care about — for example, ending world hunger, creating better health care for all, or making quality education more accessible.
With your list of values in place, you have a moral compass to direct the funds and companies to invest in. From here, decide whether you want to manage your investments or have a money manager do it for you.
If the latter, find a company that specializes in SRI investments. Another option is to use robo-investors, which are programs that use algorithms to build and manage your investment portfolio. It keeps your investments within your risk tolerance and goals.
Some robo-advisors that help you find and invest in socially responsible funds and individual stocks include Betterment, Ally Invest, Personal Capital, and Wealthsimple.
However you decide to invest, you’ll need to open a brokerage account. If you’re investing on your own, find a local firm that specializes in socially responsible investing. If you don’t have one nearby, consider Fidelity or Merrill Edge, which allow you to search for funds that match your portfolio goals.
Before making an investment, do your research. Ensure the company or fund you’re investing in has good reviews and a reputation for being a fair employer. Check with third-party sites like Glassdoor and Morningstar for unbiased information from employees to see how the companies treat their workers. If there are comments about unfair pay, inequality, or other social issues, then you know it’s not worthy of your money.
Next, check the company’s revenue and net income to see if it’s a financially safe investment. If you opt for a fund, review documents like its prospectus, fact sheet, and quarterly reports, which will show the fund’s holdings (the companies it invests in) and expense ratio (annual fees taken from your investment).
If the expense ratio is 2% annually, then you’ll pay $20 for every $2k you invest in that fund. So the lower the expense ratio, the better for you.
As you’re building your SRI portfolio, keep diversity in mind. You don’t want to put too many eggs in one basket. Avoid allocating more than 5% of your portfolio into a single stock. Spread your investments across different stocks, mutual funds, and ETFs to prevent a major loss if one goes down.
Becoming a socially responsible investor is invigorating. There’s nothing like the feeling of helping the world change for the better. As more SRIs and ESGs emerge, it’ll become easier for businesses to find the right investments.
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