What is Socially Responsible Investing?

July 23, 2013

growth-planthandsSome investors consider a fund’s risk level or its past performance, but other investors may consider if an investment is aligned with their values. These investors may seek out environmentally friendly investments that focus on clean energy and water, for example, or they may avoid investing their money in companies that are involved in gambling, tobacco or weapons. This practice is called socially responsible investing, or SRI. (It also may be known as socially conscious investing or ethical investing).

Socially responsible investing can cover a wide swath of issues, like climate change, human rights, and executive compensation. But most fall into three broad categories: environmental, social and governance (often abbreviated as ESG).

Environmental and social issues are perhaps more familiar to investors than corporate governance, which considers factors such as executive compensation, shareholder rights, and the diversity (and independence) of a company’s board of directors.

The process of socially responsible investing typically includes positive or negative screens.

Positive screens seek to include companies that have certain desirable qualities, such as family-friendly workplace policies or environmentally friendly business practices.

Negative screens exclude certain companies or industries, such as weapons makers or nuclear power companies.

A growing number of mutual funds and ETFs include socially responsible screens in their investment process. Just as there are wide variety of issues that socially responsible investing covers, there are a wide variety of funds that investors can select from. Some funds, like PowerShares WilderHill Clean Energy (PBW), are concentrated in one area of the market, while other funds like Green Century Equity (GCEQX) are more diversified. Funds like iShares USA ESG Select (KLD) invest solely in the U.S.. while other funds like Portfolio 21 (PORTX) can invest internationally.  There are both passively managed funds that track a socially conscious index, and actively managed funds that apply a socially conscious screen to the stocks selected by the fund manager.

We’ll look at the socially conscious funds in NoLoad FundX next week. In our next post, we’ll­ examine some of the pros and cons of investing in socially responsible funds.

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