Socially Responsible Investing (SRI) (2024)

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Socially responsible investing, or SRI, is an investing strategy that aims to help foster positive social and environmental outcomes while also generating positive returns. While this is a worth goal in theory, there is some confusion surrounding SRI is and how to build an SRI portfolio.

What Is Socially Responsible Investing?

Socially responsible investing is the practice of investing for both social betterment and financial returns. This looks like either choosing investments that align with your values or avoiding investments that don’t.

These different approaches can be broadly categorized as negative screening and positive screening. With the former, investors avoid owing securities sold by companies that are seen as not socially beneficial. With the former, investors actively choose to support companies that implement positive social and environmental policies.

“Negative screening could entail excluding companies involved in weapons, defense, tobacco or fossil fuel extraction and production, for example,” says Brian Presti, a chartered SRI counselor and director of portfolio strategy at The Colony Group.

On the other hand, positive screening may seek out companies whose products or services contribute to decarbonization, financial inclusion or health and nutrition.

“In both approaches, investment decisions are governed by values and societal impact considerations,” says Presti.

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How Is SRI Different from ESG?

ESG investing—another acronym that stands for “environmental, social and governance”—is sometimes used interchangeably with SRI. However, the terms refer to two separate practices.

“The primary difference is that ESG investing often uses more of a financial materiality lens rather than a specific values-based one in security selection,” Presti says.

At its core, ESG is a risk-mitigation strategy. ESG investors consider the material risks to a company’s future performance due to its environmental, social and governance practices.

A company that doesn’t treat its employees well may lead to a workers’ strike. A company with poor waste management practices could get fined or face government regulation.

“Combining ESG research with traditional financial considerations can give a more holistic view of an investment and help identify risks and opportunities of that investment,” says Carey Burke, ESG/sustainability product lead at Hartford Funds.

“Integrating ESG factors into the investment process does not mean it will lead to positive ESG outcomes nor does it constrain the investment universe, but it does bring additional considerations into the security selection process,” Burke says.

How Can You Make Socially Responsible Investments?

Making socially responsible investments isn’t hard as long as you know what values you want to focus on or avoid.

For example, the sustainable investing universe of funds has grown fivefold in the past decade, according to Morningstar, which counted 534 sustainable funds as of 2021. More than 121 of those funds were newly launched that year, 48 more funds than had been launched in 2020.

The values you target with SRI can be environmental, social, religious or just about anything you hold dear.

Socially Responsible Mutual Funds and ETFs

Many mutual fund and ETF providers now offer SRI options, such as the Parnassus Core Equity Fund (PRBLX), which incorporates all ESG factors into its decision-making process, or the iShares Global Clean Energy ETF (ICLN) that invests in socially responsible companies focused on clean energy.

Some fund providers also provide exclusively SRI investments, such as Calvert Investments, which offers more than two dozen SRI funds, including both stock and bond as well as international and domestic options.

Just be sure to do your homework and understand each fund or manager’s research and portfolio construction process, Presti says. “Fund managers should not only be responsible investors but responsible owners as well, using their power as shareholders to effect positive change on important ESG issues.”

One of the strengths of mutual funds and ETFs is the ability to pool investor resources, giving funds greater clout when it comes to demanding positive change from companies.

You can see if a fund manager is using their clout for the greater good through their proxy voting guidelines, shareholder advocacy, public policy initiatives and company engagement practices, Presti says. “These practices may help to ensure long-term impact, values alignment and positive ESG outcomes.”

How to Build an SRI Portfolio

The easiest way to build your own SRI portfolio is to let an advisor create it for you. Human financial advisors will do this, or you can turn to a robo advisor, several of which are coming out with socially responsible portfolio options.

Betterment lets you choose from three SRI portfolios based on the impact you want to have: climate, social or a broader ESG-focus. Wealthfront also offers a socially responsible portfolio option. Both robo advisors charge the same 0.25% management fee for their SRI options as they do for traditional portfolios.

If you want a more personalized approach, you could also build an SRI portfolio of investments you choose yourself.

Historically, the most common way to build an SRI portfolio is by excluding companies that you find objectionable, such as those engaged in the tobacco or gambling industry, Burke says.

Downsides of Building Your Own SRI Portfolio

There are two main drawbacks to using an exclusionary approach for building your own SRI portfolio.

First, you may underperform the broader markets if the industries you’re excluding experience periods of strong performance. The recent outperformance of energy stocks has created a headwind for funds that exclude fossil fuel producers or the entire energy sector, Presti says.

“The corollary is the lack of energy exposure may have led to tilts in other sectors that haven’t performed as well, such as technology,” he adds.

The second pitfall to excluding certain industries is that it does not guarantee your remaining portfolio is aligned with your values. “For example, a fossil fuel-free portfolio may still hold companies in the materials or industrials sectors that aren’t engaging in responsible carbon emissions or pollutions practices,” Presti says.

To help mitigate these potential risks, he says, you may want to incorporate a comprehensive analysis of ESG factors into your decision-making. This combination of SRI and ESG is common in many sustainable funds.

“However, please note that a number of ESG investing strategies do use exclusionary screens, or if they don’t, similar industries are often excluded as a result of their investment process,” Presti adds.

Is Socially Responsible Investing Profitable?

SRI focuses on creating positive social change by incorporating moral values into investment decisions.

Socially responsible investors are less concerned with minimizing the financial risks of immoral business practices than they are with ensuring their investment dollars are supporting good causes—or at least avoiding the bad ones. Financial returns are secondary to doing good.

This doesn’t mean SRI can’t be both morally upstanding and profitable. In 2022, the Morningstar U.S. Sustainability Index outperformed its non-SRI parent by more than 0.6% and the S&P 500 by 0.7%. Similarly, most sustainable funds outperformed their Morningstar category indexes on a risk-adjusted return basis in 2021.

A meta-analysis by the NYU Stern Center for Sustainable Business of more than 1,000 research papers published between 2015 and 2020 found that among studies focused on risk-adjusted attributes, 59% found that sustainable options performed as well or better than conventional approaches while only 14% saw a negative result.

If you’re interested in SRI, make sure you’re aware of the different types of available investments and understand how any provider you partner with defines the term. Not everyone applies it in the same manner, Burke says.

You should also be open and transparent with your financial professional about what SRI means to you and how you want to invest, she says. As with any investment portfolio, “Ask about the risks and drawbacks of those decisions.”

I'm an expert in socially responsible investing (SRI) with a deep understanding of its principles and practices. My expertise is backed by hands-on experience and a comprehensive knowledge of the concepts discussed in the article you provided.

The article begins by defining SRI as an investment strategy aiming to foster positive social and environmental outcomes while generating returns. It highlights two main approaches: negative screening, where investors avoid securities from socially detrimental companies, and positive screening, where they actively support companies with positive social and environmental policies.

The distinction between SRI and ESG (environmental, social, and governance) is explained. ESG is described as a risk-mitigation strategy, considering material risks to a company's performance due to its environmental, social, and governance practices.

The article further delves into how to make socially responsible investments, mentioning the growth of sustainable investing options and the availability of SRI mutual funds and ETFs. It emphasizes the importance of understanding each fund or manager's research and portfolio construction process.

Building an SRI portfolio is discussed, presenting options such as letting an advisor create it or using robo-advisors with SRI options. The drawbacks of an exclusionary approach for building a portfolio are outlined, including potential underperformance and a lack of guarantee that the remaining portfolio aligns with one's values.

The profitability of socially responsible investing is addressed, with a focus on creating positive social change. While financial returns are secondary, the article mentions instances where SRI has outperformed traditional benchmarks. Research findings indicate that sustainable options often perform as well or better than conventional approaches.

In conclusion, the article advises those interested in SRI to be aware of available investments, understand provider definitions, and communicate openly with financial professionals about their preferences and concerns.

Socially Responsible Investing (SRI) (2024)


What do you mean by socially responsible investment or SRI? ›

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.

What is the socially responsible investing SRI movement? ›

Socially responsible investment, or SRI, is a strategy that considers not only the financial returns from an investment but also its impact on environmental, ethical or social change.

What are socially responsible investing funds SRI funds? ›

Socially responsible investing is the practice of investing for both social betterment and financial returns. This looks like either choosing investments that align with your values or avoiding investments that don't. These different approaches can be broadly categorized as negative screening and positive screening.

What is the difference between ESG and SRI? ›

SRI is a type of investing that keeps in mind the environmental and social effects of investments, while ESG focuses on how environmental, social and corporate governance factors impact an investment's market performance.

What is an example of SRI? ›

One example of socially responsible investing is community investing, which goes directly toward organizations that both have a track record of social responsibility through helping the community, and have been unable to garner funds from other sources such as banks and financial institutions.

What are the different types of SRI? ›

Types of Socially Responsible Investing

There are several different types of SRI strategies that investors can choose from, depending on their values and investment goals. The main types of SRI strategies are negative screening, positive screening, best-in-class approach, community investing, and thematic investing.

Do Sris outperform or underperform non Sris? ›

SRI funds tend to outperform non-SRI funds for below-the-median outcomes, and this outperformance is especially strong during bear markets. funds when comparisons are made at the quantiles away from the median. These differences increase dramatically deeper in the tails of these distributions.

Is socially responsible investing worth it? ›

The overarching conclusion: SRI does not result in lower investment returns. Not everyone agrees, of course. But there is certainly support for individual investors and trustees of institutional funds to pursue SRI strategies.

Is ESG falling out of favor? ›

Activist investors are expected to carry out fewer environmental and social campaigns this year after the strategy proved less lucrative than other shareholder agendas, according to business consulting firm Alvarez & Marsal Inc.

Does SRI hurt investment returns? ›

The main finding from this body of work is that socially responsible investing does not result in lower investment returns.

Why invest in SRI funds? ›

Sustainable and Responsible Investment (“SRI”) also referred to as socially responsible investment or sustainable investing, represents an investment strategy that takes into account not only financial returns but also emphasizes positive environmental, social, and governance (ESG) outcomes.

What is the difference between SRI and CSR? ›

What are the differences between SRI and CSR? Socially responsible investing (SRI) is a type of investing that excludes companies failing to behave in a socially responsible manner. Corporate social responsibility (CSR) is a model that businesses can follow to ensure they are operating in a socially responsible manner.

When did SRI become ESG? ›

Over time, SRI steadily evolved to look much like today's corporate social responsibility (CSR) and was focused primarily on social issues such as human rights and supply chain ethics. However, it wasn't until the 1990s that ESG considerations started to appear in mainstream investment strategies.

Is ESG part of SRI? ›

The most common types of sustainable investing are socially responsible investing (SRI), which excludes companies based on certain criteria, and ESG, a more broad-based approach focused on protecting a portfolio from operational or reputational risk.

What does SRI stand for in CSR? ›

Two major alternative terms for similar approaches are: For corporate actions (CSR, Corporate Social Responsibility) and for investing (SRI, an acronym used for several phrases — Socially Responsible investing, Sustainable and Responsible Investing, Sustainable, Responsible and Impact Investing).

What is an example of a social investment? ›

There are two main types of social investment
  • Borrowing (debt) Taking out a loan which you agree to repay over a set period of time. Most debt investments are paid back with interest - a fee you pay to the investor for the use of their money. ...
  • Shares (equity) Selling shares in your organisation to an investor.

What is the socially responsible investing index? ›

The index is a capitalization weighted index that provides exposure to companies with outstanding Environmental, Social and Governance (ESG) ratings and excludes companies whose products have negative social or environmental impacts.

What is the relationship between SRI and ESG? ›

SRI versus ESG

The most common types of sustainable investing are socially responsible investing (SRI), which excludes companies based on certain criteria, and ESG, a more broad-based approach focused on protecting a portfolio from operational or reputational risk.

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