A penny saved is a penny earned, so the old saying goes. But choosing an investment can be tricky. More and more people are making socially responsible investment choices with their money, such as backing companies that are doing good for the environment or promoting the welfare of animals.
The trend toward socially responsible investing (SRI) began in the late 1980s and early 1990s. It seeks a balance between an investor’s financial needs and the investment’s impact on society. Most major investment organizations now offer SRI choices. However, labels such as “green” or “pet friendly” are largely unregulated, which means choosing a fund simply because it sports such a label isn’t always the wisest decision. You need to do research to ensure you’re really making a conscience-easy investment choice.
Ultimately, it comes down to personal preference. You need to find a company you feel proud to invest in, but that will also prove to be a worthwhile financial choice.
Finding a fund
SRI choices are available in the form of mutual funds, pension funds, bond funds and more. Before investing, find a financial advisor who respects your values and will work with you to find a suitable option. Screens are one way to narrow down your options. Screens are an electronic method that involves entering desired criteria such as load, minimum initial purchase, volatility and other elements.
A screen should be as detailed as you can make it. “A fund may have ‘socially responsible’ in its name, but it may not screen for behaviors that are important to you,” says Robert W. Hampton, CPA at Impart Financial in Fort Worth, Texas.
Negative SRI screens can be used to weed out offenders: companies that partake in animal testing or extensive factory farming, as well as those with pollution issues or whose products do not promote human or animal welfare.
Positive SRI screens can pinpoint companies with commendable characteristics: production practices that promote sustainability and alternatives to animal products or testing, or that use green forms of fuel consumption or production.
Another factor is to decide how deep you want to dig. “Does a company that has a small portion of what they do in an activity you do not approve of taint the selection of that stock?” says Robert. “There is no right or wrong answer; it is up to you how important the screen is. Granted, the tighter you screen, the less investment choices you have – but that may be the price you are willing to pay for investing with your conscience.”
Vote with your wallet
Aside from the personal satisfaction of doing the right thing, sinking your investment into an SRI company is a step toward making a positive impact on the future. If a company doesn’t pass through screens, the chances of an investor choosing it become slim, leaving the company with less cash available for research, equipment and daily operations. By “voting with your wallet” in this way, you can use your investment to voice displeasure at a socially irresponsible company, while financially rewarding the positive traits of another company.
Investor action has brought about changes in the past. For example, apartheid unraveled once investors boycotted companies doing business in South Africa. And Talisman Energy, Canada’s largest independent oil company, changed their ways when the voice of investors insisted the company suspend operations in Sudan, a region under humanitarian scrutiny.
Ensuring financial gains
The basic reason for investing is to realize financial gains, so an SRI investment should provide a reasonable payoff.
Beyond what your financial advisor tells you, study an SRI fund’s advertisement or prospectus. According to a study by the Natural Capital Institute, “if the performance is lower than accepted benchmarks such as the S&P [Standard & Poor’s 500-stock index] or Dow Jones, the language will focus on the fund’s mission. If the performance is as good as or better than standard indices, the language will highlight returns.”
Also observe what is happening in the political and economic spectrums. Sometimes, going in at the ground level of a unique or unknown product may pay off when the winds of social change shift.
“There are several great resources online designed to help investors research SRI funds,” says Louis Berger, Co-Founder/Principal at Washington Square Capital Management in New York. “Socialfunds.com and socialinvest.org are two websites with free online SRI mutual fund guides that provide fund performance data and information about the criteria SRI fund managers apply to their investment decisions. Investors should read each fund’s prospectus before making a final investment decision.”
The socially responsible investor has a wide variety of high-performing funds from which to choose. While some SRI mutual funds come at slightly higher management costs to investors, the ease of conscious and vote for a better future may deem it worthwhile.
If an investment is in your plans, take stock of your social beliefs and what type of future you hope to leave to the next generation. Then seek out a financial advisor to help you put your plan in action.