Socially Responsible Investing (SRI) is an investment approach that uses both financial and non-financial information to align an investor’s social and environmental values with the pursuit of competitive financial returns.
SRI has much in common with traditional investing. Investors typically use IRAs and taxable brokerage accounts and invest through mutual funds, exchange-traded funds (ETFs), individual stocks, and individual bonds. They also rely on familiar tools—diversification, rebalancing, and benchmarking—to optimize performance and manage risk.
Where SRI differs is in how values are integrated. SRI investors use negative and positive screens, environmental, social, and governance (ESG) data, and shareholder engagement to reflect their priorities in portfolios.
Negative screening. Many socially responsible investors choose not to profit from companies they believe are harmful to people or the planet. They may exclude specific companies or entire industries. Common exclusions include fossil fuels, firearms and military weapons, tobacco, and gambling.
Positive screening. Investors may also actively seek companies whose products or services can be both profitable and beneficial to a more sustainable global economy—for example, producers of renewable energy, lenders to green buildings, or firms advancing regenerative agriculture.
Using ESG data. ESG data helps investors evaluate the practices and culture they care about personally and believe matter to long-term financial success. Examples include companies that set emissions targets aligned with limiting global warming to 1.5°C, provide equal pay for equal work, and ensure fair treatment of workers throughout their supply chains.
Shareholder engagement. Investors can use ownership to influence companies on social and environmental issues. Many SRI funds have long track records of engaging directly with company management—called shareholder advocacy. When dialogue does not lead to agreement on practices the fund believes are in the company’s best interests, the fund may file a shareholder proposal to encourage action. Many SRI managers publish these activities in annual stewardship or impact reports.
Proxy voting. Another way to encourage change is through proxy voting. Fund managers with pro-social and pro-environment proxy guidelines often vote in favor of greater disclosure and measurement of greenhouse-gas emissions, pay equity, and workforce diversity, equity, and inclusion (DEI). Individual stockholders can also vote electronically themselves or use proxy-voting services to align ballots with their values.
Bottom line. SRI uses the same vehicles and risk/return tools as traditional investing while uniquely integrating values into the investment process.
In my next article, I’ll discuss how SRI uses negative and positive screening as a foundation for values-based investors.
Scott Kadish is a Certified Financial Planner at Greenvest in Newton Center.