If you're looking to invest in companies that seek the betterment of society in addition to a desire for profits, socially responsible investing could be for you.
Impact investing attempts to tackle greenhouse gas emissions, climate change, human rights violations, social justice, reducing the average consumer’s carbon emissions footprint, fighting the modern slave trade and promotingenvironmental, social and governance (ESG) best practices.
How Does Socially Responsible Investing Work?
Socially responsible investing (SRI), or ethical or impact investing, refers to an investing practice that looks beyond the ups and downs shown on financial statements. It takes into account environmental, social and governmental impacts.
For example, if an investor doesn’t believe in supporting Big Tobacco, they can steer clear of investments related to that type of industry. ESG principles speak to an investing strategy that looks outside the stock market for results.
If you’re investing in a business that wishes to promote shareholder advocacy, you will find that that stock is not solely seeking short-term gains but also trying to adopt business practices that make the world a better place.
History of Socially Responsible Investing
SRI figures strongly in 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. A surge emerged in modern times in the 1960s during the Vietnam War, and most recently, in today’s social, economic and political climate, SRI is an even hotter topic.
Benefits of Socially Responsible Investing
Creating a sustainable future is part of the discussion in schools, businesses, colleges and universities and individual homes. People are more aware than ever of the ways human activities affect the planet.
SRI includes financial, social and human value considerations, and people realize that their passion for embracing responsible habits can be part of all areas of their lives, from the cars they drive to the stocks they select.
Investors also have access to educational resources and research, which help to contribute to responsible investing decisions. Other contributing factors include:
- Performance: Many stocks and mutual funds offer excellent returns; it’s a matter of doing the research and selecting which ones are best.
- Availability: Hundreds of firms are aware of people’s desire to have a socially responsible portfolio and offer impact funds and pooled investment vehicles for investors to meet that goal.
Socially Responsible Companies
Specific company examples are easy to drum up. Consider Starbucks, for example. A well-recognized leader in community and environmental sustainability, Starbucks scores high points for the following:
- Community: Starbucks partners with nonprofits in the community to donate money on every transactions. Starbucks also supports employee engagement in 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.
- Environment: Green stores, cups and green energy are part of the mantra for Starbucks.
A few more socially responsible companies include Cisco Systems, Intel, General Electric, IBM, 3M and Apple.
Your investing approach should mix growth stocks with ESG factors that are meaningful to you. You may not be able to chase all ESG stocks and make a hefty profit. Diversifying your portfolio is the smartest thing to do in any situation.
How to Invest in Socially Responsible Companies
The Dow Jones Sustainability Indices (DJSI) indicate the performance of a collection of U.S.-based companies that are considered globally sustainable. 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.
Research the Company
Browse financial statements from the U.S. Securities and Exchange Commission (SEC), checking price action and news. You’ll also need to determine what catalysts may lie ahead so as not to get caught off guard by events. Potential events that cause a stock to move include earnings report dates and investor presentation days. Companies aim to make money for their investors. Good companies to invest in are profitable, maintain their profitability in good times and bad and grow their profits for the future.
Determine the Amount to Invest
Figure out how much you want to invest. Buying shares in a company gives you part ownership of the company. You should only invest an amount you can afford to lose because investments carry risk. If you’re investing in stocks, know that they can be volatile and can drop in price.
Determine Your Timeline
You’ll want to plan your investments, including when to exit if things go bad, as in when an investment falls below a certain level. Investors identify three timelines — short-term (day trading), intermediate-term (swing trading) and long-term (buy-and-hold).
Determine the Broker
Once you’ve done research on a company, decided how much to invest and determined your timeline, you can contact an online or brick-and-mortar broker, sign up for an account, fund the account and buy the investment. You can 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 could pick a mutual fund or another alternative that provides exposure to SRI stocks.
Place Your Buy
Investors generally use two types of buy orders — market order and limit order. A market order executes 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.
Sell the Stock
Once your goal has been achieved or a pain point has been crossed, you can sell the stock and use the proceeds to reinvest.
Broader Impact of Socially Responsible Investments
SRI no longer solely means not investing in companies that have no connection to tobacco, alcohol, firearms or gambling — it’s become far more proactive. But how do you know how sustainable a certain company actually is? There is no definitive test for what’s sustainable and what is not, nor is there an audit strategy to determine what it means to be socially responsible. It’s most important that the company you’re considering aligns with your values and requirements.
One of the most exciting aspects of sustainable investing is the wide range of choices you have. Stocks, mutual funds, exchange-traded funds (ETFs) and alternative investment opportunities are available to you among hundreds of companies that cater to investors looking for sustainable opportunities.
Whether you’re trying to support the environment or your local community, your personal worldview means more than ever when it comes to this type of investing. Open your brokerage account and make investing decisions that feel appropriate for you, focus on community impact and don’t be afraid to make changes to your portfolio based on ESG issues.
Ready to start investing in socially responsible companies? Check out Benzinga's top picks for the best socially responsible mutual funds.
Frequently Asked Questions
What does ESG represent?
ESG stands for environmental, social and governance factors and is used to evaluate the sustainability and ethical impact of a company or investment. It focuses on a company’s impact on reducing climate risk like reducing fossil fuels, how it treats its employees and communities and its leadership and accountability. ESG has become more important as sustainability, and responsible business practices are prioritized by many investors and stakeholders.
How is SRI different from ESG?
SRI and ESG are investment strategies that consider ethical values and sustainability. SRI focuses on aligning investments with social and environmental principles, while ESG assesses a company’s practices in areas such as carbon footprint and board diversity.
Is socially responsible investing profitable?
Socially responsible investing can be profitable because companies with strong ESG practices tend to outperform their counterparts in the long run. These companies are better equipped to manage risks and adapt to market conditions. Additionally, socially responsible investing can attract investors who prioritize values-aligned investments, leading to increased demand and potentially higher returns. However, profitability can vary depending on specific investments and market conditions.