Socially Responsible Investing
Many people do not feel comfortable with investing because they do not want to participate in capitalism – a system in which private individuals and businesses own the means of production of goods and services which they operate for a profit.
But there are alternatives to the pure profit motives of unrestrained capitalism. Socially responsible investing considers financial performance, but also considers Environmental, Social, and Corporate Governance (ESG) factors.
Broadly speaking:
Environmental factors include how well a company manages its environmental impact and addresses environmental problems in areas such as air, water, climate, pollution, agriculture, water, and animal welfare.
Social factors include how well a company treats all its stakeholders, its diversity and equity practices, workplace conditions, community relations, and human rights.
Governance factors include how corporate power is checked and shared through such venues as political contributions, executive compensation, board diversity, board independence, transparency and disclosure.
You can see more detailed examples of ESG issues on the ESG wheel from the US Sustainable Investment Forum. While a company may excel in some of these areas, few companies excel in all of them – so knowing which issues are most important to you will help guide your investment decisions.
Screening in and out
Although socially responsible investing began as a way to exclude certain companies or industries from your investment portfolio, it has grown to also include companies and industries with strong policies and practices on sustainability and equity.
This is known as screening:
You can screen out companies with poor ESG track records or whose business model does not align with your values. Examples include fossil fuels, weapons manufacturers, tobacco and alcohol, private prisons, or industrial agriculture.
You can also screen in companies whose products, policies, or practices help build a more sustainable and equitable world. This can be done by using ESG to benchmark corporations and identify best in class, or to evaluate risk and return.
Screening out and screening in are sometimes referred to as divest and invest -- moving your money away from doing harm and toward doing good.
Performance
A common misperception about socially responsible investing is that it results in lower returns. Not true!
Years of research studies show that responsible investing generates returns as good or better than conventional investing -- especially for long-term investments such as retirement plans.
Lived experience also makes the point. The first socially responsible index fund, the MSCI KLD 400 established by Amy Domini in 1990, has consistently outperformed the general index of large and mid-cap US stocks for more than 30 years.
Popularity
Over $6.5 trillion is invested in funds marketed as ESG or sustainability focused, according to US SIF’s 2024 Trends Report. The report found that 73% of asset managers surveyed expect moderate or significant growth in the sustainable investing market.
The Morgan Stanley Sustainable Signals 2024 report found that 84% of individual investors in the United States are interested in sustainable investing, with almost half saying they are very interested. Young people especially care about sustainable investing as a way to shape the world they will inherit.
Use your money to build a better world
Because of its success, socially responsible investing has increasingly come under attack on both the state and federal levels. Often these attacks emanate from a coordinated campaign funded by wealthy entities with a financial stake in maintaining their profits in an unsustainable and unequal world.
You can push back by using your money to build a better world through:
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