What Is Socially Responsible Investing (SRI) and How to Get Started - NerdWallet (2024)

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Picking up litter, volunteering at a hospital, donating to racial justice organizations, investing — which of these is not like the others? When it comes to making the world a better place, investing isn’t the first thing that comes to mind. But socially responsible investing, or SRI, is more attainable and profitable than ever.

Once considered a fairly radical strategy, SRI has increasingly gained in popularity. According to a 2019 Morgan Stanley survey, 85% of individual investors are interested in sustainable investing, up from 75% in 2017. The options available to those investors have also grown: Investment research company Morningstar says there were 303 sustainable open-ended mutual funds and exchange-traded funds in 2019, up from 111 in 2014.


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Socially responsible investing, or SRI, definition

Socially responsible investing (SRI) is an investing strategy that aims to generate both social change and financial returns for an investor. Socially responsible investments can include companies making a positive sustainable or social impact, such as a solar energy company, and exclude those making a negative impact.

SRI tends to go by many names, including values-based investing, sustainable investing and ethical investing. The abbreviation “SRI” has also come to stand for sustainable, responsible and impact investing. Some SRI practices use a framework of environmental, social and governance factors to guide their investing. This is generally referred to as ESG investing.

Ready to get started? Jump to how to build a socially responsible investing portfolio.

Understanding socially responsible investing

Investors interested in SRI don’t just select investments by the typical metrics — performance, expenses and the like — but also by whether a company’s revenue sources and business practices align with their values. And since everyone has different values, how investors define SRI will vary from person to person.

If you’re passionate about the environment, your portfolio will likely have investments in green energy sources such as wind and solar companies. If you care about supporting the advancement of women, people of color and other marginalized groups, you may have some mutual funds that invest in women-run companies or hold stock in Black-owned businesses. And since socially responsible investing is as much about the investments you don’t choose as the ones you do, you may choose to divest from a company if you learn that it mistreats LGBTQ employees.

Since everyone has different values, how investors define SRI will vary from person to person.

You may find that some SRI funds match your values while others do not — and you may be surprised at what companies end up in an SRI fund. For example, Vanguard’s VFTSX fund is screened for certain ESG criteria and excludes stocks of certain companies in industries such as fossil fuels and nuclear power. But the fund’s holdings include Amazon and Facebook — two companies some SRI investors have opted not to support.

In the past, SRI funds have been tied to higher fees than their traditional counterparts, but according to 2019 Morningstar data, of more than 40 diversified ETFs that follow ESG criteria, 13 charge expense ratios between 0.09% and 0.2% per year, which is quite low.

And while you certainly can find more expensive SRI funds, you can also find fairly inexpensive ones. For example, the Fidelity U.S. Sustainability Index Fund (FITLX) has an expense ratio of 0.11% and an above-average portfolio sustainability score of 50. According to Morningstar, the average asset-weighted expense ratio across all passive funds was 0.13% at the end of 2019, higher than Fidelity’s sustainable fund.

» Need more info? Learn about a typical mutual fund expense ratio

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SRI performance

Does a do-good investment strategy perform as well as the standard? The short answer is yes. A 2020 research analysis from asset-management firm Arabesque Partners found that 80% of the reviewed studies demonstrated that sustainability practices have a positive influence on investment performance.

Several other studies have shown that SRI mutual funds can not only match traditional mutual funds in performance, but they can sometimes perform better. There is also evidence that SRI funds may be less volatile than traditional funds.

In the past, there have been doubts about SRI, with opponents arguing that narrowing the field of investment options also leads to a narrowing of investment returns. Now, there is a growing pool of evidence that shows the opposite: SRI isn’t just good for your heart, it’s good for your portfolio, too.

How to build a socially responsible investment portfolio

Creating an ethical portfolio doesn’t have to be difficult or intimidating. As long as you know the values that are important to you, you can start using your investment dollars for good. Here’s how to build an SRI portfolio:

1. Decide how much help you want

There are a couple of avenues you can choose when it comes to creating an ethical portfolio. You can build it yourself, picking and choosing specific investments and monitoring them over time, or you can get some help. Choose from the two options below to get started:

I want to DIY my SRI. If you want maximum assurance that the companies you’re investing in support your personal definition of SRI, you may want to create your own SRI portfolio. If this is the path for you, head to step two.

I want help. The majority of people prefer to make socially responsible investments when possible — but it takes some work to figure out how committed a company really is to ethical practices. This is where robo-advisors come in. Robo-advisors use algorithms to build and maintain an investment portfolio based on your risk tolerance and goals.

The upside of robo-advisors is they’re inexpensive, and several offer SRI portfolios that will do all the work of finding ethical investments for you. The downside is that they don’t let you add in specific investments you’re interested in. Note: If you choose a robo-advisor, the next steps listed here won’t be required. However, knowing about the entire process could be useful in the future.

Here are some robo-advisors that offer socially responsible portfolios:

  • Betterment: Provides three impact portfolios to choose from: Broad Impact, Climate Impact and Social Impact.

  • Wealthfront: Offers a pre-made socially responsible portfolio. You can customize any portfolio with socially responsible ETFs.

  • Merrill Edge Guided Investing: Clients can invest in an ESG portfolio and request restrictions on certain ETFs.

» Invest ethically (and easily). Explore robo-advisors with socially responsible portfolios

2. Open an investing account

If you’ve decided to go it alone, you’ll need to open a brokerage account first, which is where you can buy and sell investments. Some brokerages have stronger socially responsible investing offerings than others. For example, Merrill Edge and Fidelity have screener tools to help you find the right funds for your portfolio.

» Ready to build an SRI portfolio? Learn more about how to open a brokerage account

3. Outline what’s important to you

It may be helpful to specifically write down what you’re looking for in an SRI or ESG investment. Are gun manufacturers a deal-breaker? Would you be comfortable owning stock in a company that scores lower in the environmental category if it had a majority-female board of directors? Knowing what industries you are and aren’t OK with supporting will make it easier to include or exclude certain investments.

» View our list: The best EV stocks

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4. Research your investments with care

Once you have a brokerage account and you know your priorities, you can start building a portfolio that supports what matters to you. An easy way to judge how socially responsible a company is is to review ratings from independent research firms such as Morningstar. Two types of investments you may consider for a sustainable portfolio are stocks and funds.

Individual stocks generally shouldn’t encompass more than 5% to 10% of your portfolio, but if there is a company you expect will show strong growth, you may want to include it. In addition to factors like revenue and net income, you may want to see if the company produces a sustainability report you can read, how diverse their board of directors is and how their employees grade the work culture through a third-party site such as Glassdoor. (Learn more about how to research stocks.)

Mutual funds are an easy way to instantly diversify your portfolio, and there are more sustainable funds to choose from than ever before. Mutual funds include selected assets that adhere to criteria laid out by the fund manager. If your broker has a screening tool, it can likely help you sift through different fund options to find the right ones for you. Some funds have a specific focus area, such as advancing women in leadership or investing in companies that are fossil-fuel free.

To read about the nitty-gritty of a particular fund, you’ll want to look through its prospectus, which should be available through your broker's website. Two important things to look for are a fund’s holdings (a list of every company the fund is invested in) and its expense ratio. Expense ratios are annual fees taken as a percentage of your investment. So if you invest $1,000 in a mutual fund with a 1% annual expense ratio, you’ll pay $10 a year. Some funds that are labeled as socially responsible have higher expense ratios, but there are plenty of funds that are similar in cost or even cheaper than traditional funds.

» Ready to find funds? See the top-rated ESG funds

As an enthusiast with a deep understanding of socially responsible investing (SRI), let me delve into the concepts mentioned in the article and provide insights.

1. Socially Responsible Investing (SRI):

  • Definition: SRI is an investment strategy aiming to generate both social change and financial returns. It involves investing in companies with positive sustainable or social impacts while excluding those with negative impacts.
  • Aliases: Also known as values-based investing, sustainable investing, ethical investing. The abbreviation "SRI" may stand for sustainable, responsible, and impact investing.
  • ESG Investing: Some SRI practices use Environmental, Social, and Governance (ESG) factors as a framework for guiding investments.

2. Understanding SRI:

  • Investors in SRI consider not only traditional metrics like performance and expenses but also whether a company's revenue sources align with their values.
  • SRI is highly personalized, with individuals selecting investments based on their values. Examples include investing in green energy for environmental enthusiasts or supporting women and marginalized groups.

3. SRI Funds:

  • While historically SRI funds had higher fees, recent data from Morningstar suggests that many SRI funds have expense ratios comparable to traditional counterparts.
  • Example: Fidelity U.S. Sustainability Index Fund (FITLX) with an expense ratio of 0.11%.

4. SRI Performance:

  • Research analysis from Arabesque Partners in 2020 found that 80% of studies demonstrated sustainability practices positively influencing investment performance.
  • SRI mutual funds not only match traditional funds but can sometimes outperform them. There's evidence suggesting SRI funds may be less volatile.

5. Building an SRI Portfolio:

  • Investors have two main approaches:
    • DIY Approach: Investors select specific investments aligned with their definition of SRI.
    • Robo-Advisors: Algorithm-based advisors that build and maintain SRI portfolios based on risk tolerance and goals.

6. Steps to Build an SRI Portfolio:

  • Open an Investing Account: If going solo, open a brokerage account. Some brokerages like Merrill Edge and Fidelity offer tools to find suitable SRI funds.
  • Define Priorities: Clearly outline what is important in SRI or ESG investments. This may involve excluding certain industries or emphasizing diversity.
  • Research Investments: Use independent research firms like Morningstar to assess a company's social responsibility. Consider individual stocks (5-10% portfolio) and mutual funds for diversification.
  • Expense Ratios: Evaluate expense ratios (annual fees) of funds. Some socially responsible funds have comparable or even lower expense ratios than traditional funds.

In conclusion, SRI is not just a socially conscious investment; it has demonstrated positive performance and is becoming increasingly popular among investors. Building an SRI portfolio involves aligning investments with personal values while considering factors such as performance and expenses.

What Is Socially Responsible Investing (SRI) and How to Get Started - NerdWallet (2024)
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