One of the most important things we do as financial planners is help clients align their money with their values, and socially responsible investing (SRI) can be a meaningful way to do that. We offer our clients the opportunity to invest partially or fully in SRI portfolios that are carefully chosen to mimic the structure and performance of broad market index funds while still having a tilt towards social responsibility. 

The landscape of what’s available is changing constantly, and we’re always on the lookout for opportunities to blend social responsibility with strong investment performance. Here’s an update on how we’re thinking about and approaching socially responsible investing.

What is socially responsible investing?

In essence, the idea behind socially responsible investing is to rule out the “bad” companies from your investment portfolio (think: fossil fuels, tobacco, firearms) and to invest your money only with companies that are making the world a better place (or at least not actively wrecking it). It’s a simple concept that has a lot of powerful potential behind it. The idea of socially responsible investing has been around for a long, long time, but it has really become popular within  the last few decades, and has expanded into a wide array of investment options.

The term “socially responsible investing” is often used interchangeably with many other names, but three main types largely cover what’s available: 

1. SRI (socially responsible investing) really refers to actively choosing or avoiding investments based on specific—and sometimes strict—ethical guidelines
2. ESG (environmental and social governance) stands for a company’s environmental, social and governance practices (e.g. pollution controls, treatment of employees and compliance with regulators). ESG rating systems assess the quality of companies’ ESG policies, aiming to offer an objective ranking to help investors decide whether or not to invest.
3. Impact investing directly invests in businesses or organizations that are completing projects, creating products or taking actions that positively benefit society.

What makes an investment “socially responsible”?

What makes an investment “ethical” or “good” is ultimately up to the investor’s judgment. This is the main challenge with socially responsible investing. It is subjective by nature, and one person’s idea of a socially responsible portfolio might look wildly different from the next person’s socially responsible portfolio. 

Thankfully, non-profit organizations like As You Sow and Green America are dedicated to helping investors navigate and evaluate the many socially responsible investment products that exist, but as you’ll quickly discover while using these tools, there can be conflicting scores even within individual companies. For example, Tesla may score highly on environmental factors, especially because it’s an electric vehicle and solar provider, but it has a low score for gender equity according to As You Sow’s sources. 

ESG rating systems aim to bring objectivity to socially responsible investing, but they are far from standardized. There are a number of third-party ESG rating organizations that all have different methodologies, and so one organization’s ESG rating may not be as strict or look at quite the same factors as their counterparts.

How do socially responsible investments compare to standard investments?

We wouldn’t be seeing such an explosive growth in the socially responsible investing space right now if it wasn’t at least competitive with non-SRI investing. By 2020 $16.6 trillion of professionally managed assets in the U.S. were using ESG strategies (that’s about $1 in every $3 invested), which is a 42% increase from $11.6 trillion in 2018. Investors are not only demanding more values-aligned portfolios, but research also points to considering ESG factors as a prudent way to manage an investment portfolio—in other words, it’s not only socially responsible but also financially responsible. 

An exhaustive study in the Journal of Sustainable Finance & Investment sifted through the findings of about 2,200 empirical studies dating back to the 1970s on the relationship between ESG criteria and corporate financial performance and found that ESG had a consistently positive effect on corporate financial performance over time. Intuitively, it makes sense that a company with good ESG factors, such as treating their employees well, being responsible stewards of the environment, and cooperating with regulators, are more likely to be less risky investments. 

One of the tricky aspects of socially responsible investing is deciding on how far you want to take it, because SRI has the potential to substantially affect your investment returns. For example, a more strictly defined “impact investment” portfolio (referenced earlier as meant to only positively impact society) may invest solely in renewable energy, which sounds like an environmentalist’s dream, but the risk is that renewable energy is a tiny, tiny sector of the whole ecosystem of investments. Having that kind of intense concentration in only one sector of the market could spell disaster for the portfolio if something happened to make such a relatively small group of companies take a nosedive, which could be something as simple as a policy change or a supply shortage of a certain raw material. 

Thinking Big’s approach to socially responsible investing: ETFs.

The key to ensuring our clients’ ESG investment portfolios are competitive with the broader market is diversification. Thinking Big uses ESG-screened ETFs (exchange-traded funds) when building client portfolios. An ETF is essentially a bundle of stocks or bonds that allows investors to buy a fractional share of the entire pool, which can be anywhere between 100 and 3,000 different securities (typically stocks or bonds). This allows investors to achieve diversification without the need to actually buy hundreds of individual securities. 

Like stocks, shares of ETFs are freely traded on market exchanges and have low fees because they’re built to mimic the behavior of a broader index (for example, the S&P 500, an index of 500 large U.S. companies). Thinking Big also uses ETFs because they are highly liquid, meaning they can easily be bought and sold.

Right now, investors can choose from about 70 available socially responsible ETFs. We currently use a combination of mostly Vanguard ESG funds and an iShares ESG bond fund for our ESG portfolios. These funds are still well-diversified and track broad market indexes, while they also screen out stocks from certain industries, particularly: adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power. 

Looking ahead

From our perspective, the socially responsible investing landscape is still in the throes of major growth and evolution. More ETFs with ESG approaches are being created than ever before, and major investment companies like Vanguard are just getting started adding ESG options to their menus, offering even more robust and low-cost options. There are also some really exciting new products emerging, like the Adasina Social Justice All Cap Global (JSTC) ETF launched in 2020 and the brand new LGBTQ Loyalty Holdings Inc (LFAP) ETF launched just this year. 

We believe socially responsible investing and ESG considerations are only going to become more woven into the financial planning process, especially when it comes to the comprehensive, values-based approach that we take with clients. The ability to express your values through your investments is a powerful thing, especially when many people are doing it on a massive scale, as shown by the trends we’re seeing and the large financial institutions that are following suit. We’re excited to see how the socially responsible investing space continues to evolve and to find even more ways to help our clients do good with their investments.