What Is Socially Responsible Investing (SRI) and How to Get Started
As seen in NerdWallet on January 13, 2021
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.
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.
