Socially Responsible Investing: How To Become A Conscious Investor

When you’re investing your hard earned money, do you care more about profits or the planet?

I bet you didn’t realize that some of the companies you’re already investing in are not acting in a socially conscious way. Meaning, they’re doing something that has a negative impact on the environment, the social atmosphere around them, or their corporate governance.

Anyone remember Enron?

For this reason, socially conscious investing is becoming more and more popular, specifically with millennials. In fact, investments in socially responsible strategies are up 89 percent since 2012, according to The Forum for Sustainable and Responsible Investment. There are now over 150 funds (worth $135 billion dollars) that focus exclusively on socially conscious companies.

Is socially conscious investing for you? Read on to find out.

What is socially responsible investing?

Socially responsible investing or conscious investing, also known as ESG investing (more on that below), is investing based primarily on a company’s environmental and social impact on society. It focuses on the ESG criteria, which is broken down into three things—environmental, social, and governance.

Socially conscious investors use these three factors to determine whether or not they’ll invest in a company. Let’s break these down a little further:

Environmental criteria

This is the company’s overall impact on the environment. Here are some examples of questions you might research to determine a company’s environmental impact:

• Does the company burn through or conserve natural resources?
• Do they use renewable or nonrenewable energy resources?
• Do they have buildings and equipment that pollutes the environment?
• How do they discard of (or repurpose) waste?
• What is their stance or impact on animal treatment?

Knowing the company’s values with regard to the environment is important, but it’s also important to know how they have handled environmental blunders in the past.

Remember the major BP oil spill a few years ago? The company got absolutely torched for the way they handled the situation. A socially conscious investor will know, and be comfortable with, the way a company handles these types of unexpected situations.

Social criteria

The social aspect is all about relationships. When evaluating a company on their social impact, you’ll want to know how they treat customers, employees, and other stakeholders of the organization.

For example, are they all about collecting the dollar, or do they place a heavy focus on the customer’s experience (which happens to be a major hot button issue in all industries right now)?

Social criteria also evaluates the company’s impact on the communities it serves. Do they give back to the community? Do they hire employees from local colleges?

Speaking of employees, that’s a huge piece of the social impact. Find out if the company treats their employees well—benefits, work/life balance to name a few—or if they work them to the bone and pay them next to nothing.

Social criteria is difficult to evaluate independently, so if you’re not relying on other research (as I’ll talk about later) you’ll really need to dig into the company’s annual reports, but also do some due diligence on social media. For instance, what are their employees saying about them on Twitter and YouTube?

Governance criteria

Finally, the governance criteria covers many ethical issues. This might be things like accounting methods, the amount they pay their leadership in bonuses, or how they conduct internal audits.

One way companies can slip through the cracks here is with their internal controls. This means that they may technically be following legal guidelines with how they do business, but they’ve found a loophole that allows them to still act kind of shady.

Controls are guidelines set, often by the company themselves, to hold themselves accountable for doing things the right way. Oftentimes, socially conscious companies will establish strong internal controls to go above and beyond any required legal requirements. Again, you can get most of this information from the reports the company files with the SEC.

That seems like a lot of work… isn’t there any easier way?

As a newer investor, your head is probably spinning at the thought of going even further with your analysis of a company to evaluate whether they’re socially conscious. Thankfully, a lot of the work is already done for you.

Many investment firms are constructing socially conscious mutual funds and ETFs. In fact, last year Morningstar launched an ESG scoring system for mutual funds and ETFs which is designed to help socially conscious investors make quicker investment decisions on funds that focus on the ESG criteria.

The Aspiration Redwood Fund is a new sustainable mutual fund with a low $500 minimum and a “pay what’s fair” expense ratio (you read that right, it’s a donation-based investment company).

What are the tradeoffs to this type of investing?

Okay… so we’re investing in companies that do awesome things for the environment. You’re probably thinking of a startup that uses all renewable resources and recycles and repurposes everything, right? Sorry, it’s not always like that.

Sure, there are companies that are heavily involved in environmental and social initiatives, but it seems the industry hasn’t quite caught up yet. There just don’t seem to be enough of those types of companies out there.

For instance, the Vanguard FTSE Social Index fund got trashed by The Motley Fool last year for holding companies that are not seemingly “socially conscious,” such as McDonald’s, Pepsi, JPMorgan Chase, and Tyson Foods, to name a few. All of these companies have been criticized for things that fall well outside of being considered “socially conscious.”

The lesson here is to be wary of jumping into a fund just because it says it’s socially responsible.

The other thing to consider is fund performance. While all funds vary, and there’s no perfect way to predict future performance, people in the financial industry have seen their clients’ socially conscious funds drastically underperform against standard S&P 500 index funds.

So what should I do?

Ultimately, this is a decision you have to make. Socially conscious investing is much different than investing for profit.

Typically, a socially conscious investor is looking for the ESG criteria FIRST, then they’ll focus on performance. If that’s you, and you want to put your money toward companies that do right by the environment and socially, then I say go for it. If profit is your primary concern, you may want to re-evaluate.

I’m personally incredibly passionate about the environment and the treatment of animals and other people. I wouldn’t invest in a company that did things to harm the environment, animals, or people. But that’s me.

You have to do what’s right for YOU. And if you choose to invest in Pepsi, I won’t judge. You’re just looking at it from a more logical financial perspective, perhaps.

Summary

Whatever you decide, don’t make any financial or investment decisions because you feel pressure from someone else. You are the one who has to live with, and be happy with, your financial decisions. If you’re unsure, talk to a financial professional.

Read more:

• Stash App Review: Boutique Investing For The Discerning New Investor
• The Beginner’s Guide To Value Investing