Socially Responsible Investing 101: Is It Possible?

Socially responsible investing is taking off. If you want to grow your wealth in alignment with your values, here are some things to know first.

Are you intrigued by the idea of investing with a purpose, simultaneously growing your personal wealth while supporting social and environmental causes? If so, you’re not alone. For the past few years, the concept has been steadily gathering steam among individual investors of all ages.

If you’re just starting to investigate this investment approach (which includes socially responsible investing and its variants, impact and ESG investing), you might be wondering about the reasons behind its appeal and if there are any downsides to it.

In short, socially responsible investing is possible, but it’s not a completely cut and dried investment strategy. In this article, we’ll cover the basics of socially responsible investing and its ESG variant, the pros and cons, and some tips to keep in mind should you decide to allocate assets in this way.

ESG Vs. SRI Investing

Environmental, social, and governance (ESG) investing and socially responsible investing (SRI) can be viable strategies to grow your wealth in a way that aligns with your personal values. Before you get started with either approach, it’s important to understand the difference between ESG vs. SRI investing, so you can decide whether either is a fit for your specific financial plan and goals.

ESG Investing At A Glance

ESG investing attempts to screen or rank companies from all available investment options based on quantifiable metrics on their environmental impact, commitment to social responsibility, and governance practices. The form of screening can be inclusive, known as a “positive screen” for companies that perform well in these three categories, or exclusive, where companies that do not meet certain thresholds are excluded entirely.

There is no single screening methodology for ESG funds; however, there are common practices. For example, when evaluating a company’s eligibility for an ESG fund, an ESG consulting group may consider the efforts the company is undertaking to reduce its environmental footprint.

While it’s not a new investment strategy, ESG has been top of mind for many investors in recent years as environmental and social issues dominate news cycles around the world. Global ESG investments are expected to more than quadruple from $11.35 trillion in 2012 to a projected $50 trillion by 2025.

“At their current growth rate, ESG-mandated assets‰Û_are on track to represent half of all professionally managed assets globally by 2024,” according to Deloitte.

SRI Investing At A Glance

In contrast to ESG investing, traditional socially responsible investing exclusively screens or eliminates companies out of the pool of eligible investment options based on more subjective criteria or wide-ranging, generally accepted values.

The major difference between SRI and ESG investing is the singular focus on social responsibility whereas ESG is broader in scope, making considerations for environmental impact and corporate governance. This use of a negative screen is another difference when choosing socially responsible investing vs. ESG.

Socially responsible investing can be a highly personal strategy, as long as you are clear on your priorities and objectives. For example, you may choose to eliminate companies involved in the gambling sector from your portfolio if you disagree with the mandates of these organizations from a moral standpoint.

Finally, similar to ESG investing, socially responsible investing is on the rise. This trend is not surprising, in light of the fact that 75% of Americans say it’s unacceptable for companies to only make money; they must also have a positive impact on the world.

“Results of a 2021 survey by investment firm Natixis showed that millennial Americans, now in their late 20s through early 40s, are twice as likely as the general investor population to focus on SRI investments,” according to Investopedia.

Pros And Cons Of Socially Responsible Investing

Benefits of socially responsible investing include…

Competitive Returns

It used to be that you had to sacrifice investment returns in order to invest this way. Today, it’s no longer the case that your portfolio has to suffer. One analysis revealed that six out of 10 sustainability-focused funds delivered higher returns than equivalent conventional funds over the past decade; another study showed that similar funds strongly outperformed the competition in early 2020, when the COVID pandemic hit.

However, keep in mind that the stock market as a whole is already pricing in many investor expectations related to social and environmental issues. If current market expectations undervalue the importance and economic impact of these issues,over time, markets may reward the companies that have prioritized these causes, and vice versa. So, to design a portfolio that attempts to focus more on these elements may not be necessary for every investor, since SRI and ESG criteria are not specifically designed to optimize returns based on financial criteria alone.

Dual Rewards: Profit & Purpose

While you could always avoid investing in companies that are contrary to your values, you can now identify groups of companies that align with your passions and actively support them. The idea of “doing well by doing good” appeals to many people who feel strongly about particular causes.

Arguments against socially responsible investing include…

Challenges In Selecting The Right Funds

Since there is no single definition of what constitutes a so-called “socially responsible company,” there are plenty of ways to rate and rank these organizations. ESG investors may find conflicting ratings on companies provided by different ratings agencies. Efforts are underway to try to bring more standardization to the industry, but until then, it’s helpful to enlist a financial advisor to identify and analyze the funds that best align with your goals.

Higher Management Fees

A common argument is that fund managers tend to charge more in fees than they would for conventional funds, which can negate higher returns. These higher fees are due to the fact that identifying companies that are a good fit for a particular portfolio requires more research and special screens. Now, thanks to greater investor demand, there are more analysts who specialize in this area and more ESG-related information available from companies, which has brought the price down.

ESG Vs. SRI Investing: Important Considerations

Now, let’s walk through seven essential points surrounding ESG and SRI investing to consider when creating your investment portfolio, whether on your own or with your financial advisor.

1. Know the difference between ESG, SRI, and impact investing.

Potential investors often confuse ESG, SRI, and impact investing, but you’re not likely to find companies that are specifically focused on the environment in an SRI portfolio. There can be some overlap because, by eliminating companies such as weapons manufacturers, you may reduce the carbon footprint of your portfolio. However, SRI is generally geared toward companies with certain moral or social values.

2. Choose SRI investing to screen out specific industries and/or company types.

With ESG investing, you can’t screen out particular sectors or company types. As a result, you could potentially find an adult entertainment company in an ESG fund if the business was making a positive contribution to the environment. When pursuing socially responsible investing, know that the more restrictive you want to be with your investments, the more concentrated your portfolio will become, potentially introducing risk.

3. Exercise due diligence with your investment choices.

Due diligence is always necessary with your investments, but it’s especially so if you’re considering SRI or ESG. it’s common to hear about fund companies rolling out high-cost products that are “greenwashed” (i.e., falsely conveyed as being environmentally responsible investment choices). So, you need to ask questions that you wouldn’t necessarily have to ask in an evaluation of non-SRI or non-ESG funds. For example, if you’re looking at a mutual fund that claims to be environmentally responsible, you must ask how the fund companies are achieving that objective.

4. Consider your existing investments.

Before adding new companies to your portfolio, think about how your ESG investment would fit in. Be sure you’re not overinvesting in a particular industry or asset class, and rather than investing in individual companies, we recommend ESG mutual funds. They are naturally diverse, and all holdings have been vetted by experts who are not only skilled at screening but also understand what makes a solid investment.

5. Understand your potential for returns.

ESG investing has become more accessible in recent years, and the number of funds available has increased, which means returns have improved as well. This investment strategy may be an ideal fit if you are primarily concerned with returns rather than screening out specific industries or companies you do not support. However, keep in mind that if you wish to implement an investment strategy that excludes fossil fuels, that may come with a tradeoff in terms of returns and diversification.

6. Always invest based on your risk tolerance level and cash needs.

You must assess your propensity for risk before implementing any strategy in your portfolio. Everyone has a different comfort level for investing, and the types of funds that are right for you will depend partly on your ability to tolerate volatility in the stock market. Your investment strategy should also consider your short term cash needs. If you’re able to keep your money invested for several decades as opposed to just a few years, you’ll have the opportunity to invest more aggressively if you wish.

7. Review the fund periodically to see if your investment is making a difference.

To see if your fund is actually having as positive of a societal impact as you expect, ask to see the aptly-named impact report. Impact reports cover topics like shareholder engagement, carbon footprint, and gender diversity on the Boards of the companies included in your fund all of which allow you to evaluate the impact you’re having as an investor.

Looking for expert investment guidance?

ESG and SRI are both solid strategies for investors who want to grow their wealth in a way that aligns with their personal values. The key point to remember about these strategies (and any others) is to execute them with your end objective in mind. At Curio Wealth, we take a goals-based approach to financial planning, and we consider your complete financial picture before we recommend a course of action.

If you’re interested in discussing an investment strategy to help you reach your future objectives, schedule a call with us today to get started.

Important Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Curio Wealth, LLC [“Curio Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Curio Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Curio Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Curio Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at Please Note: Curio Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Curio Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Curio Wealth client, please contact Curio Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

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