Investing in socially responsible funds may not be the first thing that comes to mind when you consider how and where to invest your money, but they are an excellent choice. There are plenty of socially responsible investing (SRI) mutual funds and ETFs that align your investments with your values.
A socially responsible fund focuses on companies that meet certain standards for how they treat their employees, suppliers and the environment. You can invest in these types of strategies by looking at specific sub-categories within the larger fund family: environment, social and governance (ESG), human rights, new markets and clean energy.
The following guide will help you understand what SRI investing is, how it works, and where to find more information so you can make smart investment choices.
What Is Socially Responsible Investing?
These funds are often called “ethical funds” and “socially responsible fund” because they select companies based on their social, environmental and governance (ESG) standards. If a company doesn’t meet these standards, the fund managers won’t invest in it.
This means less risk of contamination from toxic industries such as tobacco and firearms, and less risk in general because you’re not putting your money into companies that mistreat their employees or pollute the environment.
How Does Socially Responsible Investing Work?
The way these funds are structured and managed is similar to core funds: A team of experts decides what stocks and bonds to include in the fund, and how much money to put into each investment.
With socially responsible funds, fund managers screen companies to find those that meet certain ethical and environmental criteria. They then decide how much money to put into these companies based on the fund’s investment objective.
Once they have determined which companies to include in the fund, they distribute the money equally among the companies.
Criteria for Selecting a Socially Responsible Fund
Before you select a socially responsible fund, you’ll need to decide what issues are most important to you. Commonly screened issues include corporate governance, environmental, human rights and social issues, and political contributions.
Once you’ve decided which issues matter to you, you can research socially responsible funds that screen companies based on these criteria. It’s important to review each fund’s investment objective to make sure it aligns with your values. For example, some funds have a broad investment mandate that includes companies in industries you may not support, such as tobacco and the fossil fuel industry.
You can also research whether the socially responsible fund has a clean track record of meeting its objectives. Some funds offer new approaches that may be untested by time, so it’s important to see how long each fund has been in operation.
Socially responsible funds can help you meet your investment goals. For example, if your financial goals include saving for retirement or reducing debt, you can select funds that have a focus on income-producing investments, such as stocks and bonds. If your goals are long-term, such as saving for retirement, you can select funds that have a focus on growth-producing investments, such as real estate and stocks.
The Bottom Line
Socially responsible investing offers a way to tailor your investments to meet your ethical, social and environmental values. When you select a socially responsible fund, you’re screening companies based on certain ethical and environmental criteria.
Once you’ve selected a fund, you can monitor its progress to make sure it continues to meet your values.