Socially responsible investing 2022: How to get started in 6 steps

If you want to put your dollars into causes you care about, one of the easiest ways to get started is through socially responsible investing. The strategy prioritizes financial return with the caveat that the money is invested to fuel positive change in three key areas: environmental, social and corporate governance (ESG). Perhaps you’re looking to help reduce pollution, address gun violence, promote animal welfare or advocate for employee rights.

Whatever your cause, socially responsible investing allows you to earn a return while making an impact.

What is socially responsible investing (SRI)?

Socially responsible investing is an investment approach that considers the social impact and moral values of an investment as well as the expected financial return. The impact of the investment is considered before the potential profit. An investor who focuses on the social impact of their investments will likely consider ESG factors as they’re evaluating potential investment opportunities.

For example, these investors typically avoid investments in fossil fuels or in the tobacco and firearms industries because of their negative impact on consumers and society.

According to the US SIF Foundation’s Report on U.S. Sustainable and Impact Investing Trends 2020, the three letters of ESG have been attracting some big numbers. Total assets in sustainable investments grew from $12.0 trillion at the start of 2018 to $17.1 trillion at the start of 2020. Keep in mind that those figures were at the very beginning of 2020 – before the challenges of the pandemic forced many investors to think carefully about where their money is going.

“In 2020, the COVID-19 health and economic crises and murder of George Floyd and other Black people in America highlighted the urgent need to confront social and economic inequality and calls for racial justice,” says Farzana Hoque, a research consultant at US SIF, The Forum for Sustainable and Responsible Investment.

• The growth of socially responsible investing

The focus on socially responsible investing has been steadily increasing for several years and the pandemic only fueled it further. Assets are expected to rise to $50 trillion by 2025 from about $35 trillion in 2021, according to Bloomberg Intelligence.

Money invested in sustainable mutual funds and ESG-focused ETFs rose 53% in 2021 and sat at $2.47 trillion globally at the end of June 2022, according to Morningstar. The funds added net new assets of nearly $33 billion during the second quarter of 2022 and Europe accounted for 82% of the funds’ total assets. However, the U.S. lost $1.6 billion in sustainable fund assets during the second quarter, the first outflow in over five years.

• Socially responsible investment performance

Many investors have questions about whether a socially responsible investment strategy means sacrificing investment returns. In 2021, most sustainable funds earned better total and risk-adjusted returns than their category indexes, according to Morningstar. Sustainable U.S. large-blend funds beat their traditional fund peers in 2021 as well as over the trailing 3- and 5-year periods.

In 2020, U.S. sustainable equity funds outperformed traditional peer funds by a median of 4.3 percentage points — the largest difference in performance recorded since 2004, according to Morgan Stanley.

Investment performance relies on many factors outside the scope of ESG, but recent performance suggests investors shouldn’t let subpar investment performance concerns keep them from a socially responsible investment strategy.

• 6 important questions to ask as you get started with SRI

Are you looking to earn cash while making change? The best way to start is to do some in-depth research. There are plenty of complexities to the world of social investing, and it’s good to educate yourself so you understand where you might be putting your money. A good place to start is the US SIF Foundation’s free 30-minute online course.

As you think about making your portfolio sustainable, consider these key questions.

1. When will you need the money?

One of the most important pieces of sustainable investing is the same as traditional investing: You need to know your timing. Do you need money in five years? Ten or more? Understanding your timeline is a critical piece of determining what should be in your portfolio.

2. How much risk are you willing to take?

The next question is also a consideration no matter where you’re putting your money: How do you feel about knowing you might not get it back? Here’s a simple rule to follow: The more diversified your investments are, the less volatile your portfolio will be.

If these investments are meant to be retirement assets, be sure they match your risk tolerance as you age. If you’re younger, you might want to consider a riskier mix of assets. If you’re nearing retirement age, you’ll want to consider more conservative investments.

“Investors still should really think through if a strategy [focused on sustainable investing] is right for them,” says Casey T. Smith, president of Georgia-based Wiser Wealth Management. “Many ESG funds are heavily tilted toward growth stocks, specifically tech funds.”

3. Which brokerages look like your best bet?

You’ll need a broker or an individual who executes trades and is paid a commission when you buy or sell securities. You can pick from well-established names like TD Ameritrade, Charles Schwab and Fidelity. If you’re okay with less of a human touch, robo-advisors like Betterment, Earthfolio and Impact Labs use algorithms to automate your investments.

There are quite a few more options. In fact, the US SIF Foundation identifies 530 institutional investors, 384 money managers and 1,204 community investing financial institutions in its latest Trends report. With so many options, make sure you spend time researching the brokerage that best caters to your timeline and needs. Be sure to pay attention to fees, too. There may be another brokerage that offers the fund you want at a lower price.

4. What’s your moral code?

Make a list of what’s important to you. For example, BlackRock offers products that explicitly exclude firearms manufacturers. Meanwhile, State Street and others offer funds focused on addressing climate concerns. Whatever you’re passionate about, look for mutual funds or other securities that are connected to those causes.

5. Do you want to avoid too much additional research?

In addition to what you want to invest in, you can also explore exclusionary funds, which are focused on leaving certain kinds of companies out of the mix. For example, consider Vanguard’s ESG U.S. stock fund. Your investment is indexed across approximately 1,500 stocks. Sifting through each of those companies would be far too much work, so Vanguard’s fund leaves out companies that:

• Produce alcohol, tobacco, gambling and adult entertainment
• Produce civilian, controversial and conventional weapons
• Produce nuclear power
• Do not meet certain diversity criteria
• Have violations of labor rights, human rights, anti-corruption and environmental standards defined by U.N. Global Compact Principles
• Own proved or probable reserves in fossil fuels such as coal, oil or gas

Rather than having to pick individual stocks and research individual companies, you can sleep easy knowing that your money isn’t going to benefit any business you don’t believe in.

6. Should you divest some of your assets?

Take a look at your current portfolio, and consider divesting from any assets that don’t fit your objectives. Divesting, the opposite of investing, is the process of selling an asset in order to meet your financial, social or political goals. Often, you can sell your assets and reinvest them into your new sustainable funds. That’s especially easy to do if your divested funds are in the same brokerage firm as your new sustainable-focused funds.

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Socially responsible investing by the numbers

• Assets invested based on sustainability are expected to reach $50 trillion in 2025, up from about $35 trillion in 2021, according to Bloomberg Intelligence.
• Money invested in sustainable mutual funds and ESG-focused ETFs rose 53% in 2021 and sat at $2.47 trillion globally at the end of June 2022, according to Morningstar.
• The $2.47 trillion level was a 13.3% quarterly decline, but that was less pronounced than the 14.6% decline for the broader market.
• Global sustainable funds added $32.6 billion in net new money during the second quarter of 2022, according to Morningstar, with Europe accounting for 94% of the growth.
• U.S. sustainable funds lost $1.6 billion in assets during the second quarter of 2022, the first outflow in more than five years.
• Most sustainable funds earned better total and risk-adjusted returns than their category indexes in 2021, according to Morningstar. Sustainable U.S. large-blend funds beat their traditional fund peers in 2021 as well as over the trailing 3- and 5-year periods.
• U.S. sustainable equity funds outperformed traditional peer funds by a median of 4.3 percentage points in 2020 – the largest difference in performance recorded since 2004, according to Morgan Stanley.