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What Is Socially Responsible Investing (SRI) – Types & How to Get Started


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Deciding how to invest your money is a complicated business. There are many factors to consider, such as risk and return, taxes, inflation, dividends, and diversification. Just figuring out how to get the best return on your money takes a lot of thought and planning.

Yet there are some investors who deliberately choose to make it even more complicated. When they choose stocks to invest in, they don’t just worry about how financially stable a company is and whether its stock is selling at a good price – they also ask whether it’s a company that helps to make the world a better place.

Socially responsible investing, or SRI, is the act of choosing your investments on the basis of social good as well as financial gain. Socially responsible investors aim to invest in companies that do business in positive and responsible ways. In general, they look for companies that have a good record on what are known as ESG issues: environment, social justice, and corporate governance.

Although most investors in the U.S. aren’t socially responsible investors, their ranks are growing. According to a 2014 report by US SIF, an organization for socially responsible investors, the total amount of money invested in managed funds that use SRI strategies has grown from less than $1 trillion in 1995 to more than $6.5 trillion at the beginning of 2014. That’s more than one out of every six dollars under professional management in the country.

History of Socially Responsible Investing

The roots of socially responsible investing go back hundreds of years. In the 1700s, members of the Religious Society of Friends – better known as Quakers – refused to take part in the slave trade or to invest in weapons of war. Around 1750, John Wesley, an early leader of the Methodist church, wrote a famous sermon, “The Use of Money,” in which he declared that it was a sin to make money at the expense of your own or your neighbor’s welfare. He specifically urged his congregants not to be involved in gambling, usury (loaning out money at unreasonably high interest rates), and industries that used toxic chemicals such as arsenic and lead.

For centuries, many socially responsible investors focused on avoiding “sin industries” such as gambling, tobacco, and liquor. However, that began to change in the 1960s, when investors became interested in using their money to promote civil rights, equality for women, and better treatment of workers. SRI achieved one of its most notable successes in the 1980s, when both individual investors and institutions began pulling their money out of South Africa because of its policy of apartheid, or strict separation between races. Their efforts played a major part in bringing an end to apartheid in 1994.

It was also during the 1980s that SRI began to attract more attention from mainstream investors. The oldest investment advisor devoted specifically to SRI, Trillium Asset Management, was founded in 1982. Today, Trillium is just one of many companies that offer socially responsible funds to investors. According to the US SIF report, in 2014, there were 480 registered investment companies in the U.S. that considered ESG factors in choosing their investments.

Goals of Socially Responsible Investors

The essence of SRI is choosing investments that are in line with your values. However, those values aren’t the same for all investors.

Socially responsible investors choose their investments to promote a variety of different goals, including the following:

  • Cleaner Environment. “Green” investors prefer companies that don’t pollute the environment. Some refuse to invest in fossil fuels, while others look for companies that minimize the carbon footprint of their products and services.
  • Social Justice. Some investors refuse to do business in countries with a record of human rights violations. Others look for companies that provide their workers with fair wages and decent working conditions.
  • Promoting Peace. Like the early Quakers, peace investors won’t invest in war in any way. They avoid all companies that make weapons or profit from conflict in foreign countries.
  • Promoting Health. Many socially responsible investors refuse to invest in companies that sell tobacco or alcohol. Others refuse to invest in products that they think pose a threat to human health, such as genetically modified organisms. Since some of these products can also be seen as threats to the environment, this category overlaps with green investing.
  • Promoting Morality. Many socially responsible investors today continue the time-honored practice of avoiding “sin industries.” Different investors see this category as including different types of enterprises, such as liquor, gambling, pornography, and contraception.

Although many of these issues are popular with the political left, SRI isn’t defined by politics. Both the liberal who refuses to invest in companies that make weapons and the conservative who refuses to invest in hospitals that perform abortions are considered to be socially responsible investors – they just choose their investments based on different standards.

Socially Responsible Investors Goals

Ways to be a Socially Responsible Investor

To promote their social goals, socially responsible investors rely on four main strategies:

  1. Negative Screening. Negative screening means refusing to invest in companies that don’t meet your social standards. For instance, many socially responsible mutual funds screen out tobacco companies. An extreme form of negative screening is divestment: pulling all your assets out of specific companies because of how or where they do business. This is the strategy investors used against South African companies in the 1980s.
  2. Positive Investing. Although negative screening is the strategy people most often associate with SRI, an equally important tool is positive screening: choosing companies to include in your portfolio specifically because you approve of their behavior. One example is choosing companies that have signed the CERES principles, a code of environmental conduct for businesses developed in 1989. Positive investing is also known as impact investing, or ESG incorporation.
  3. Community Investing. This is a specific subcategory of positive investing that focuses specifically on investing in community-based organizations, especially in low-income areas. Community investment provides loans to people and organizations that would have trouble getting them otherwise. These loans can be used to fund small businesses and provide needed services such as housing and education. Community investment can also focus on making communities more sustainable by financing projects such as green energy and smart growth, a type of urban planning designed to reduce sprawl and protect green space.
  4. Shareholder Action. Socially responsible investors don’t just use their values to choose companies for their portfolios – they also try to influence the behavior of companies in which they hold stock. One way to do this is by filing shareholder resolutions – proposals for management about how to run the company. One popular example is a resolution requiring the company to disclose all the donations it makes to political campaigns. Under the Securities and Exchange Act of 1934, any investor or group of investors who owns at least 1% of a company’s stock (or $2,000 worth) can submit a proposal to be voted on at the next shareholder meeting. Even if a proposal doesn’t win a majority vote at the meeting, it can still influence the management’s decisions if it attracts a significant amount of support.

Types of Socially Responsible Investments

Socially responsible investors have a wide range of investments to choose from. Major types include:

  • Mutual Funds and ETFs. There are hundreds of mutual funds on the market that use ESG criteria. On its website, US SIF publishes a list of more than 200 socially responsible mutual funds offered by its member firms, with information about both their financial performance and the criteria they use for choosing their investments. In addition, US SIF’s 2010 report on social investing trends identifies 26 exchange-traded funds (ETFs) that use social and environmental screens.
  • Alternative Investments. Alternatives to traditional investments, such as hedge funds and property funds, are also getting into the SRI game. According to US SIF, alternative investment funds for SRI are growing at a dramatic rate. In 2012, there were a total of 177 alternative SRI funds in the country managing about $38 billion in assets. By 2014, the number had jumped to 336 funds with $224 billion in assets.
  • Community Investments. Socially responsible investors can also lend money directly into community organizations. One way to do this is to put money into community development financial institutions (CDFIs), including banks, credit unions, and loan funds, which provide credit and other financial services in low-income areas. You can find CDFI banks through the website of the National Community Investment Fund (NCIF) and credit unions through the National Federation of Community Development Credit Unions (NFCDCU).
  • Microfinance. Another way for investors to invest money where it can do the most good is through microloans, small loans made directly to startup businesses. Kiva and Zidisha are two organizations that offer microloans to entrepreneurs in developing countries, while Kabbage focuses on small businesses in the U.S.
Socially Responsible Investments Types

Getting Started With SRI

Putting your money into SRI isn’t all that different from making any other investment. All you’re really doing is adding an extra step to the process: deciding what your social goals are, and then choosing investments to promote those goals. True, this limits your investing options, but that can actually be helpful. With such a huge array of funds out there, it’s much easier to choose if you have a way of narrowing down the field first.

Here are some basic steps to follow when making your first socially responsible investment:

  1. Choose Your Social Criteria. You can’t choose socially responsible investments until you know what social goals you want to promote. Don’t worry at this point about what’s actually available or how the funds perform. Instead, just think about your values and what you want to achieve with your money. Then, write down a list of criteria that your investments need to meet to put them in line with your conscience.
  2. Choose Your Financial Criteria. Next, consider your investment goals – just as you would when making any other investment. Think about what you’re investing your money for, when you expect to need it, how much risk you can handle, and how big a return you need to meet your goals. And don’t worry that you’ll hurt your bottom line any more than in traditional investments by investing in a socially responsible way. Studies by numerous financial and academic institutions – including the Morgan Stanley Institute for Responsible Investing, the Global Impact Investing Network, and TIAA-CREF Asset Management – show that SRI provides returns at least as good as conventional investing.
  3. Find Funds that Meet your Needs. Once you’ve nailed down your social and financial goals, the next step is to find investments that meet them. One good place to look is the US SIF website, which offers handbooks on investing to advance women, fight climate change, and fight corporate money in politics. US SIF also publishes a list of funds that shows how different funds perform and what social screens they apply. You can also find recommendations for SRI funds in financial publications, such as Forbes and Kiplinger’s Personal Finance.
  4. Compare and Choose. Look at the investments on your short list and ask yourself which ones do the best job of meeting both your social goals and your financial goals. Of course, depending on what those goals are, you may need to make some tradeoffs. For example, one of my aims as an investor is to keep fees as low as possible, but the SRI funds with the lowest overall expenses don’t do the best job of meeting my social goals. So try to strike a balance based on what’s most important to you.

Final Word

Moving your money into socially responsible investments is really a win-win. It lets you make the most of your money in two different ways: You can earn good returns, and promote values that are important to you.

The only real downside is that it takes a bit more work to find the right investments to meet two sets of goals – social and financial – instead of just one. But the good news is, that’s a job you only have to do once. Once you’ve made your investment choices, you can just keep putting your money in the same place, secure in the knowledge that it’s going toward companies you can approve of.

Do you engage in socially responsible investing?


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