What Is Socially Responsible Investing?

Sustainable and responsible investing can yield competitive results. Africa Studio/Shutterstock

Want to make some green by investing in green? A growing number of lucrative socially responsible investing options are now available to the average investor.

Also known as sustainable, social, ethical, mission-based or green investing, this financial approach allows investors to make money supporting environmentally-sensitive business ventures. Those may be in existing or emerging green industries.

Screening companies

The investments are screened based on whether they meet certain environmental, social and governance (ESG) criteria and align with the investor’s personal and financial goals.

Investing is not just about making money, says Fran Teplitz, director of social investing for Green America, a consumer organization that helps investors address environmental and social issues.

"It’s about the practical long-term implications for a business," Teplitz says. "It behooves an investor to look at the environmental and social impacts a company has."

Encourages sophisticated look

Sustainable and responsible investing (SRI), the industry term, encourages a more sophisticated look at a company that can help discern whether it has sound business plans and will be a financial risk or a healthy investment in the long-run, she says.

Green America defines SRI screening as the process by which "socially-concerned investors" seek to invest with companies that have respectable employee relations, strong community involvement records, environmental impact policies and practices, respect for human rights around the world and safe and useful products.

"They also will try to avoid investments in those firms that fall short in these areas," according to the organization’s social investing fact sheet.

SRI screening also considers the company’s involvement with alcohol, tobacco, defense weapons, animal testing, employment/equity issues and proxy voting, among other issues.

Yields competitive returns

The rapid growth of SRI is the best evidence that it also yields competitive returns, according to a US SIF (The Forum for Sustainable and Responsible Investment) press release. US SIF is a national membership organization for investment professionals.

In its most recent trends report, US SIF found that SRI increased 13 percent in the three years ending in 2010. Nearly one of every eight dollars under professional management in the country, or 12.2 percent, is involved in SRI, the report states.

SRI includes stocks and bonds; savings, checking and other banking accounts; venture capital, retirement and mutual funds. The investments support a range of causes from renewable energy and clean technology companies to those that fund water purification, forest and farmland conservation efforts.

Gaining ground

Historically, many of the SRI products have been offered by firms that specialize in this area, but that’s starting to change. Even more conventional financial institutions and asset managers are beginning to offer SRI products to their clients too, the US SIF reports.

And SRI continues to gain ground. A US SIF survey last year of defined-contribution (DC) retirement plan sponsors found that 30 percent offered socially responsible investment options at this time or planned to do so in the next two to three years.

The majority of respondents predicted that demand for SRI options in retirement plans will increase or remain steady over the next five years, according to the survey by Mercer and the US SIF Foundation, the non-profit that supports the education and research activities of the organization.

SRI options are more likely to be found in the plans of non-profit, mission-based or public organizations than in corporations, the study found.

Meeting organizational, employee demands

The primary reason cited by plan sponsors for offering SRI is to align their plans with their organizational missions and to meet employee demand, the report stated. Still, 58 percent, the majority of respondents said they have minimal or no understanding of SRI investment products and indices.

So how can the average investor get started with SRI, making it more mainstream? US SIF’s and Green America resources can help you:

  • Find a financial advisor or planner that specializes in SRI
  • Invest in socially responsible mutual funds, which don’t require a large investment.
  • Be a shareholder activist. “Don’t just be a passive investor,” Teplitz says. Vote your proxy; put pressure on companies in which you invest to change their environmental and social practices, she says.
  • Break up with your mega-bank, which may have abusive practices, Teplitz urges. Switch to a community bank or credit union that takes into consideration the needs of those with low-income, among other social and environmental factors, she says.
  • Convince your employer to offer a retirement platform that includes SRI choices.

Have other thoughts on socially responsible investing? Leave us a note in the comments below.