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What is socially responsible investing?

Socially responsible investing (SRI), or impact or ethical investing, refers to an investing practice that looks beyond the ups and downs on financial statements. It takes into account environmental, social and governmental impacts.

For example, if a certain individual doesn’t believe in supporting Big Tobacco, he or she can steer clear of any investments related to that type of industry.

Where it began

Socially responsible investing is plastered all over the pages of history. You can turn back to Biblical times to see evidence of it when Jewish law contained edicts regarding socially responsible investing. The surge replayed in modern times in the 1960s during the Vietnam War, and most recently, in today’s social, economic and political climate, socially responsible investing is an even hotter topic.

Reasons for socially responsible investing

Creating a sustainable future is part of the lingo in schools, businesses, colleges and universities and even in our homes. There’s no question that people are more aware than ever of the different ways we affect the planet (and not just in an environmental capacity).

Socially responsible investing includes financial, social and human value considerations as well, and people are more aware than ever that their passion for embracing responsible habits can eke out onto all areas of their lives, from the cars they drive to the stocks they select.

Investors also have access to more educational resources and research these days, which all helps to contribute to individuals’ responsible investing decisions. Other contributing factors include:

  • Performance: There are many stocks, mutual funds and the like that offer excellent returns; it’s a matter of doing the research and selecting which one is best.

  • Availability: The sky’s the limit when it comes to availability. Hundreds of firms are now aware of people’s desire to have a socially responsible portfolio and offer countless funds and pooled investment vehicles for investors.

Examples of socially responsible investing

Specific company examples are easy to drum up. Consider Starbucks, for example. A well-recognized leader in community and environmental sustainability, Starbucks can score high points for the following:

  • Community: Starbucks partners with nonprofits in the community to donate money on every transaction to those particular nonprofit organizations. Starbucks also supports employees’ engagement in their local communities through Partner Match and Community Service Grants.

  • Ethical sourcing: Starbucks aims to increase the possibilities of ethical sourcing for tea, coffee, and cocoa as much as it possibly can.

  • Environment: Green stores, cups, and green energy are all a part of the mantra for Starbucks.

A few more socially responsible companies include:

Cisco Systems (Nasdaq: CSCO)

Intel Corp (Nasdaq: INTC)

General Electric (Nasdaq: GE)

IBM (NYSE: IBM)

3M (NYSE: MMM)

Apple (Nasdaq: AAPL)

How to choose/strategies for use

The Dow Jones Sustainability Indices (DJSI) indicate the performance of a collection of U.S.-based companies which are considered globally sustainable. It’s wise to view those companies, or using the companies within the collection to compare to other companies.

Choosing the correct investments for you will be a mix of personal choice and evaluation of performance. Check out the processes revealed in Benzinga’s How to Start Investing in Stocks and modify these steps with a socially responsible lens:

  1. Research the company – This can be done by browsing financial statements from the SEC, checking basic price action and news. You’ll also need to determine what catalysts lies ahead, so as not to get caught off guard by events. Potential catalysts, or events that cause a stock to move, include earnings report dates, investor presentation days, etc. Generally, companies (even companies focused on sustainability) have one purpose and one purpose only – to make money for their investors. Good companies to invest in are generally profitable, can maintain their profitability in good times and bad, and can grow their profits in the future.
  2. Determine the amount to invest – Secondly, you’ll need to determine how much you want to invest. Buying a share, or the stock, of a company, gives you part ownership of the company. Generally speaking, you should only invest an amount you can afford to lose. If you’re investing in stocks, know that they can be volatile, therefore, anything can happen, and stocks can go down a lot. Shorting a stock, or profiting in case a stock falls, is generally a bad idea as it could potentially expose an investor to unlimited losses if stock spikes.

  3. Determine your timeline – This includes when to exit if things go bad, as in when an investment falls below a certain level, i.e. a pain point. There are three timelines, short-term like day-trading, intermediate-term like swing trading, and long-term, such as buying-and-holding.

  4. Determine the broker – Once you’ve done research on a company, determined how much to invest, and determined what your timeline is, you can either contact a brick and mortar broker such as Scottrade, sign up for an account, fund the account, and buy the investment. You can also sign up for an online broker such as E-Trade or Interactive Brokers, apply for an account, fund the account, and buy a stock. If you have a workplace retirement account, you would need to pick a mutual fund or another alternative that provides exposure to stocks.

  5. Buy –  There are generally two types of “buy” orders: market order and limit order. A market order will execute the purchase at the present market price, while a limit order will only execute if the price falls at or below the limit price. Although a limit price might give an investor a lower price of entry, there is no guarantee that the limit order will execute.

  6. Sell the stock – Once your goal has been achieved or a pain point has been crossed, you can sell the stock, again, with either the market order or the limit order, and use the proceeds to reinvest.

Broader impacts

Socially responsible investing no longer solely means not investing in companies that have no connection to tobacco, alcohol, firearms or gambling. However, there are still a few questions that linger.

For example, how do you know how truly sustainable investing in a certain company actually is? After all, there is no litmus test for what’s sustainable and what is not, nor is there an audit strategy to determine “what it means to be sustainable.”

However, even if there aren’t a whole lot of defined, very intentional “tests” for which company is most sustainable, it’s most important that the company you’re considering aligns with your values and requirements.

Final thoughts

One of the most exciting aspects of sustainable investing is that the sky’s the limit when it comes to choice. Mutual funds, ETFs, alternative investment opportunities, and more are all available to you among hundreds of companies that cater to those looking for sustainable opportunities.

Even more exciting, whether you’re looking to support the environment or even just your local community, your personal worldview means more than ever when it comes to this type of investing.