Skip to main content

What is Socially Responsible Investing (and Should You Do It)?

Published December 15, 2021

8 minute read

David Ning

By David Ning

There’s one very specific thing I remember about my dad’s views on investing. He told me multiple times that he simply wouldn’t touch certain investments, out of principle alone. For starters, he refused to ever short a stock. That’s because shorting a stock is basically betting on someone else to fail, meaning you profit off their failure. He also refused to touch the stock of tobacco companies, even when they were all the rage in the 00s. Again, he felt there was something wrong with profiting from a company that essentially poisons its customers. As a result, he missed out on big gains. Altria, the company that makes Marlboro, was once considered the single best investment you could have owned in the S&P 500. He didn’t realize it at the time, but he was already practicing socially responsible investing.

What is Socially Responsible Investing?

Socially responsible investing (sometimes also called Ethical Investing) is exactly what it sounds like. It’s making sure your investment money is going to companies that act in a socially responsible manner. For some, that means recognizing the health and safety of their customers. It could also be a matter of human rights — or labor rights. You could also have concerns about a certain company’s negative environmental impact.

Some common examples of ethical investing are avoiding gas and oil companies due to their contribution to pollution and climate change. Or refusing to invest in fashion or apparel companies that use sweat shop labor to produce their products. You could refuse to invest in companies that are anti-union or even those that have a reputation for not supporting the LGBTQ+ community. As we’ll discuss in a minute, you are free to make your own choices about what is (and isn’t) socially responsible.

Shutterstock

Ethical Investing is More Popular Than Ever

These days, there are a growing number of people who don’t only care about maximizing their returns at all costs. They’d rather not have investments in companies whose products are designed to harm. Even if the products aren’t harmful themselves, some investors will also skip companies who don’t engage in socially responsible behavior (like coffee/restaurant companies who don’t use fair trade beans, for example). Socially responsible investing (SRI) is basically the practice of putting your money to work only in companies that are trying to make a positive impact on society.

You can pick out each company individually and invest in their stock. Alternatively, there are even ethical mutual funds and ETFs that are designed to do this for you. These are still actively managed though, so performance will vary. You also won’t have a direct say on which investments the fund gets into. Be prepared to pay a decent expense ratio on the funds. There are others options where the fees aren’t outrageous, but don’t expect to pay dirt-cheap fees like a low-cost index fund.

The Balance Between Responsibility and Profit

When we talk about investing, we usually care about one thing – profitability. The best investments are the ones making us money. That’s why the performance of U.S. technology companies is outpacing every other industry in the last decade. Unlike the Dot.Com era, these companies actually started making money. And they want to keep making more every year. The profit growth is accelerating, with no ceiling in sight.

Ethical investing, on the other hand, doesn’t just care about profit. It also cares about the social impact that the company is making. Let’s go back to Altria for a minute. It was making money hand over fist for decades. However, it was also making a product that causes a vast majority of its users to suffer major health risks and reduced lifespans. In more modern times, maybe you’re skeptical about investing in Facebook because of their issues with privacy and spreading misinformation.

Shutterstock

Where Will You Draw The Line?

The case for Altria is pretty clear cut. No matter where you stand on whether they qualify as an “evil corporation,” it’s still safe to say that they aren’t having a positive impact on society. Other companies aren’t so black and white though. The line can become blurry, and is naturally influenced by your own beliefs.

You probably wouldn’t think of Microsoft when you think of a company with social responsibility. After all, they make computer hardware and software. Sure, their products can be used to do good. However, it’s a bit of a stretch to say that their products help make a positive social impact. Then again, Microsoft says they are committed to being carbon negative by 2030. That’s very socially responsible of them, in terms of the environment.

What about alcohol or cannabis companies? You may even enjoy those products in moderation, but they can still be harmful to many others. Ultimately, you have to make your own choices on what investments you consider ethical.

Are Good Intentions Enough?

On the other hand, many people would consider Tesla a socially ethical company. After all, they specialize in producing electric vehicles, which will ultimately be good for the environment. However, actually producing the EVs themselves isn’t exactly good for the environment. Then there’s the billions of dollars that founder Elon Musk uses to fly himself into space (or simply that Tesla accepts billions in government subsidies but seems incapable of paying his taxes). Maybe Tesla isn’t the ethical investment it markets itself as.

Whether a company is socially responsible isn’t always black and white. There’s always going to be competing narratives. It’s a bit like the debate surrounding Leonardo DiCaprio’s advocacy for climate change awareness. He certainly draws attention (and money) to the cause whenever he holds an event or gives a big speech. Those things definitely have a benefit. Then again, he’s flying himself (and his friends) around the world on his private jet, increasing his carbon footprint every time. We’re not saying Leo is hypocritical or not sincere in his efforts. We’re just saying that sometimes the matter of “ethical” is only in the eyes of the beholder.

Shutterstock

It Should Be About Investing First

I firmly believe that SRI should still be about investing first. Social impact may be important to you, but that’s not enough. You still need to make sure the investment is a sound and profitable one first. After all, the goal of any investment is that the money continues to grow. If your investment in a socially responsible only loses money, you’d have been better off donating to a charity.

Remember TOMS Shoes? They marketed themselves heavily on using sustainable materials and donating a third of their profits to do “grassroots good.” If you got in early, you could have invested before it seemed like everybody in the country seemed to own a pair of their shoes. However, the company wasn’t sound financially. They were taken over by creditors at the end of 2019. Your hypothetical investment would have been wiped out completely.

What good is your socially responsible investment if the company doesn’t actually end up being a worthy investment at all?

Ethical Investing Can Still Be Lucrative

I know what you’re thinking. I just made it sound like you’ll have to forget about investment gains if you want to invest ethically. However, that’s not really the case. In 2020, Morgan Stanley found that U.S. sustainable equity funds outperformed their traditional peers. Not only that, but they also had reduced risks during the pandemic.

The longer-term picture shows similar results. The investment firm found that sustainable equity funds perform, on average, better than traditional funds without the same mandates, when they looked at data from 2004 to 2018. In the case of socially responsible investing, you might be able to actually have your cake and eat it too.

How to Invest Socially?

If you aren’t too picky about which exact companies you invest in, then funds are a good place to start. Look into ESG Funds (Environmental, Social, and Governance) to start. Your choices aren’t limited to the stock market, either. You can also invest in ESG Bond funds too.

However, these funds might not work if you’re more particular about your definition of “ethical.” Since these funds are managed by financial professionals, their understanding of “socially responsible” may be different than yours. If you want to truly vet every single company your money gets invested in, you may have to pick each stock yourself.

The good news is that whether you’re interested in funds or individual stocks, they are available to trade in the major markets. You can likely just use your favorite brokerage firm or app to buy and hold them.

Shutterstock

Ethically Investing Through a Robo-Advisor

SRI is so popular these days that even robo-advisors have gotten in on the action. Betterment, for instance, offers a variety of Socially Responsible Investing Portfolios for those who want to be socially conscious with their investments. Personal Capital and  Wealthfront have similar options available for their customers.

The beauty of going with these automated portfolios is that they handle all the investing and picking of the funds for you. If you want more of a “set it and forget” investing option — while still keeping your conscious clear that your money isn’t going to exploitative people or companies — then these robo-advisors offer a compelling solution.

Is Socially Responsible Investing for You?

I always found my dad’s personal stance on Altria somewhat strange. I mean, it made sense of the surface — “smoking kills, so don’t invest in a tobacco company.” However, my dad smoked. In fact, he was such a heavy smoker at one point in his life that he burned through multiple packs a day.

I used to wonder how much he could have earned if he took all that money spent on cigarettes and invested in Altria stock instead. Some quick math showed me that it could have been worth millions of dollars after a few decades. So yes, we could have been an extremely wealthy family. However, my dad had a firm principle against getting rich from a company that harms so many people. Then again, we could have used some of that hypothetical wealth to do a lot of good too.

Shutterstock

The Bottom Line

Did my Dad refusing to invest in Altria really make a difference to the world? Not really. They would still sell millions of cigarettes to people around the world, with or without my Dad’s investment capital. On the other hand, my Dad’s moral stance helped ensure I never picked the bad habit of smoking when I was younger. I’m sure my Dad would have happily traded those extra investment earnings to make sure his children steered clear of smoking.

Personally, I wouldn’t have felt guilty if my Dad had have decided to invest in Altria back in the day. To me, they are just investments. As long as it’s a legitimate business doing legal activities, it’s fair game in my eyes. At the end of the day, I’m just trying to pick investments that will make profit in the long run.

On the other hand, I can totally understand why some people would be uncomfortable investing in certain companies or industries. And there’s nothing really wrong with that, either. If you can still invest your money smartly, without the actions of those companies making you feel guilty, why not do it?

David Ning

Experienced Finance Writer

David is a published author, entrepreneur and a proud dad. He firmly believes that anyone can build a solid financial foundation as long as they are willing to learn. He runs MoneyNing.com, where he discusses every day money issues to encourage the masses to think about their finances more often.

Explore

Insurance

Filing For Unemployment Insurance: Everything You Need To Know

Losing a job is never easy. This is especially true if it caught you by surprise or you received little (or no) severance pay from your former employer. Thankfully, unemployment insurance is designed to help alleviate your immediate financial concerns while you look for another job. The pandemic has caused a massive amount of economic […]

Read More about Filing For Unemployment Insurance: Everything You Need To Know

5 minute read

Taxes

Common Law Marriage and Taxes: Everything You Need to Know

Common-law marriage has been practiced in the United States since the 1870s. The rules are still applied to any unmarried couples living together that meet certain conditions. If you’re thinking of moving in with your partner, that’s great. However, there are definitely some things you need to be aware of before you start pooling assets […]

Read More about Common Law Marriage and Taxes: Everything You Need to Know

5 minute read

Money

The Highest Paid Athletes of 2021

Being a superstar athlete remains a popular (although difficult) way to become a multi-millionaire. The money in the sports industry continues to explode upwards. Everything is constantly going up — television deals, ticket prices, prize money, and play contracts. This list will reveal which athletes raked in the most dough in 2021. It’s probably not […]

Read More about The Highest Paid Athletes of 2021

9 minute read

See All In Investing