How to invest for the social good

When you’re looking for ways to build your wealth and grow your retirement nest egg, investing probably ranks pretty high on your list. Over the long term, owning stocks and other similar assets often nets you a return on your investment if share prices rise or dividends roll in.

There are many investment strategies you can consider, including socially responsible investing. Socially responsible investing involves purchasing stock in businesses that seek to benefit society in some manner.

Over the past few decades, interest in socially responsible investing has grown. To accommodate this growth, many brokerage firms now offer funds that purchase stocks in companies that aim to improve the world in some manner. Whether it’s through clean energy, electric vehicles, or promoting affordable housing, there are thousands of companies seeking to make a positive difference in society. Managed and exchange-traded funds buy stocks on behalf of groups of investors, who combine their money for a percentage of ownership in the fund portfolio.

Investors seeking a more hands-on approach can also consider designing their own social investing portfolio. It requires extra work and know-how, but some people enjoy the challenge.

Whether you create your own portfolio or invest in one of the many funds that invest in socially responsible stocks is up to you. Let’s discuss the ins and outs of social investing and how you can use it in your money management strategies.

Why invest in the social good?

Check the news, and you’ll see a wide variety of calamities: Climate change and environmental catastrophes, the growing divide between the rich and poor, racial inequality, despair in impoverished and war-torn communities. It’s overwhelming.

While no single person can resolve all of society’s problems, you can invest in companies actively seeking to address these issues through their business activities, either by reducing their harmful impact or by attempting to address some of these very same problems. Your money can support their operations, and you can potentially earn a return on your investment in the process.

Two subsets of socially responsible investing may interest you: sustainable and ESG investing. While both strategies involve investing in companies that keep society’s interests front of mind, they do have slight differences.

ESG investing

ESG investing involves identifying companies that align with your beliefs concerning environmental, social, or governance factors:

• Environmental factors encompass a company’s views and policies concerning climate change, carbon emissions, fossil fuel usage, waste and disposal, and water conservation. Environmentally friendly companies typically incorporate green technology into their business operations or aim to minimize their carbon footprint.
• Social impacts involve an organization’s beliefs and actions concerning human rights, labor violations, diversity, equity and inclusion (DEI) in hiring practices, and support for local communities.
• Governance factors pertain to the company’s leadership, business ethics, and transparency between the organization and shareholders. Businesses that maintain strong governance policies have a history of tying executive compensation to company performance and emphasizing diversity and communication in the boardroom.

People who participate in ESG investing seek to own company shares or managed ESG funds (like mutual funds) that align with their personal beliefs in specific areas. For example, an individual who vigorously supports DEI initiatives will invest in companies with a history of practicing DEI in their hiring strategies and exemplify diversity from their executives to entry-level workers.

Various funds purchase stock in companies with a track record of ESG policies. Some funds concentrate on specific elements of ESG, such as the environment, while others combine different companies with varying ESG policies.

Sustainable investing

Sustainable investing is another subset of socially responsible investing. Investors who practice sustainable investing seek stock ownership in companies that support common ESG causes. However, sustainable investing also includes traditional methods to select stocks most likely to perform well financially over the long term.

Investors typically take two approaches to sustainable investing:

1. Negative or exclusionary screening involves excluding companies from a portfolio that operate in specific industry sectors or engage in certain business practices that are not ESG-friendly.
2. Positive and best-in-class screening occurs when investors purchase stocks or funds to support companies with high ratings for their ESG policies as compared to their peers.

In both approaches, the objective is similar — investing in companies with values that align with the investor’s beliefs. However, the investor will also consider long-term financial projections when making an investment decision. They won’t simply purchase the stock exclusively because they agree with the company’s mission or vision toward ESG principles.

How to invest for the social good

Determining where to invest your money starts with you. You’ll need to assess which social causes are most important to you and research to find out which companies are working toward a solution to those challenges.

To identify the social causes you most believe in, the Harvard Business Review suggests considering the United Nation’s 17 Sustainable Development Goals. Each goal identifies social causes critical to bettering society, such as access to affordable and clean energy and eradicating poverty.

Once you know which social causes are most important to you, you can search for companies that support the same causes or are pursuing a solution to the problem. To identify companies that support social causes, search for existing sustainable managed funds. Managed funds will list all the organizations they invest in, so you can use the list as a starting point for your research.

If you’re uncomfortable creating your own socially responsible investment portfolio, consider getting help from your investment firm. Many investment platforms have robo-advisors that you can use to filter stocks for socially accountable criteria. You can also set specific goals, such as risk tolerance and long-term investment objectives.

Some people prefer working with a financial advisor who can provide a tailored, socially responsible investment strategy. You can look for an investment professional with a background in ESG investing to help you identify organizations that support the same social causes you do. Working with a dedicated financial advisor is more expensive than handling the stock selection process alone. However, a professional will use industry best practices to design a customized portfolio that suits your goals.

Once you decide on your investments, you’ll want to monitor their performance and continuing business strategies. If a company you invest in deviates from supporting your social causes, you might consider selling the stock and replacing it with another company that better aligns with your values.

Pros and cons of socially aware investing

Like any investing strategy, socially responsible investing has advantages and disadvantages.

Pro: Feel good about investing in socially responsible companies

The primary reason people choose socially responsible investing is the satisfaction they get knowing they’re supporting a cause they believe in. They’re spending money on organizations with similar values as theirs. They feel comfortable knowing their investments fund companies that support the exact causes they do.

Con: Some companies overstate their commitment to social causes

In some cases, organizations use deceptive marketing tactics to convince investors they’re committed to social causes when they’re not. Conduct thorough research to avoid investing in a company that doesn’t live up to its claims. Look past the organization’s marketing materials to learn more about its dedication to social causes.

Pro: Less long-term business risk

Companies that engage in socially responsible business activities can carry less legal risk than those that don’t, as noted by the American Bar Association. That’s because non-ESG companies potentially have greater exposure to environmental, employment, or shareholder lawsuits. This might mean that, in the long term, socially responsible organizations may see more financial benefits than companies that aren’t ESG-friendly (but obviously, there’s no guarantee of that).

Con: May miss out on prime investment opportunities

Investors whose sole focus is social responsibility may not see the same financial returns as someone with a more diversified portfolio that includes companies that aren’t socially responsible. Social responsibility isn’t a requirement for an organization’s profitability. Many companies see significant gains in share price despite their lack of commitment to social causes.

Pro: Socially responsible investing may lead to higher investment yields

It’s only recently that sustainable investing became mainstream. PwC predicts that ESG stocks will comprise over 20% of assets under management by 2026. According to their study, nine in ten asset managers believe integrating ESG stocks into investment portfolios will improve returns.

Con: No universal reporting standards

There are no Securities and Exchange Commission-mandated reporting standards for social responsibility or ESG. Organizations self-report their ESG practices, so comparing one company’s ESG practices with another is difficult. Without universal reporting standards, investors must perform their own research or seek the advice of a qualified ESG financial advisor who can help them identify companies that support the social causes they’re interested in.

Investing in the social good is a noble idea

Socially responsible investing has its perks. People who invest in companies that support socially beneficial causes can rest easy knowing their money is with a company that shares their values. However, before diving into socially responsible investing, do your research to ensure it’s the right approach for you.