What Are Socially Responsible Investments?

Learn how aligning your financial goals with ethical values can make a positive impact on society while still making a profit.

Updated: May 20, 2024
Matt Crabtree

Written By

Matt Crabtree

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If we're being honest with ourselves as investors, how morally reprehensible the company or asset we're investing in is probably at the bottom of our list of concerns — who cares (or who even knows, in a lot of cases) that the company we've just bought stocks are doing some sketchy stuff if we're able to get a nice PnL (Profit and Loss) at the end of it, right?

Look no further than companies like Nestle, for example, who notoriously would target impoverished third-world countries in the 70s (though predatory practices like this continue even today with their bottled water in certain African countries) as prime marketing opportunities for their baby milk formulas.

They'd actually market their product as being better for your child than breast milk, going so far as to pay off local doctors to promote their formulas.

As a result of this, it's estimated millions of infants died, or at least grew up incredibly malnourished, as thousands of women weren't able to afford their product, so they would dilute the product with water that was often unsafe for consumption.

Still, it hasn't stopped Nestle from becoming a multi-billion dollar enterprise that's commonly traded among investors to this day.

The point is, as global issues like climate change and human rights violations are certainly showing no signs of slowing down, we've got a responsibility as investors to take a more ethical approach — it's not just about the 1.3% increase in your portfolio anymore when babies are dying because of the company you're investing in.

Fortunately, though, a lot of people are waking up to how cartoonishly evil a lot of these companies actually are, and socially conscious investing practices have never been more commonly adopted by the average trader, which is obviously a massive step in the right direction.

Having said that, there's naturally still a lot more work to do, so throughout this article, we're going to be taking a closer look at socially responsible investments — breaking down the kind of values you should be looking for in the companies you're investing in while doing your due diligence, what the UK is doing to help, and ultimately, how you can get started on your sustainable investment journey.

Unveiling Socially Responsible Investments

In the simplest of terms, socially responsible investments are basically just any kind of investment that not only provides financial returns but also incorporates environmental, social, and governance (ESG) considerations into the trade.

Now, unlike traditional investments that are purely focused on how much money you're able to make, SRIs focus more on making a positive social and environmental impact — alongside the financial gains.

This might sound like a bit of an unnecessary way of complicating trading, but just try to think of it as an opportunity to make some money while actually making a positive change in the world — meaning, of course, you need to stay away from infamously immoral companies.

Fortunately, this doesn't mean you have to abandon all diversity in your portfolio and buy stocks from companies who promise to plant a tree every now and then; it's a fairly multi-faceted approach that involves a bunch of different factors — environmental sustainability being one, but things like social justice, and responsible corporate governance matter here, too.

Let's take a look at some of the main things socially responsible traders think about while making an investment:

Positive and Negative Screening

Positive screening is pretty self-explanatory; it's basically just where you actively select investments based on ethical criteria — such as environmental sustainability or human rights.

On the other hand, negative screening works similarly as you're actively excluding companies or sectors that take part in fairly unethical or harmful business practices — such as tobacco or weapons manufacturing.

Integration of ESG Factors

A lot of socially responsible investors are looking to integrate environmental, social, and governance (ESG) considerations into their investment process, even though it's slightly more difficult to come by compared to your average company.

These sorts of factors aren't limited to but encompass things like climate change resilience and generally ethical business practices.

Challenges and Considerations

Obviously, you'll be fairly hard-pressed to find a compelling case as to why it's wrong to invest in socially responsible investments, but that doesn't mean there aren't still a few challenges that make it harder than just blindly investing in whatever company you feel like.

It's not even that there aren't a good number of ethical businesses out there; it's more about balancing these goals with being a profitable trader. We've mentioned why socially responsible investing (SRI) is important, but at the end of the day, we're traders and want to make money.

Furthermore, you're more likely to be a retail trader (with relatively limited capital) reading this article than an institutional investor with millions to burn, so it's hard to feel like you're actually making an impact by solely trading ethical companies.

This is a similar kind of plight we feel when it comes to being sustainable in our day-to-day lives, too — you might feel a little bit powerless in the grand scheme of things when you're recycling something, for instance, when you read about how Taylor Swift alone is responsible for 138 tons of greenhouse gas emissions in just 3 months with her private jet (the average person produces around 4.3 metric tons per year).

Having said this, it doesn't mean you shouldn't still give it a go, but it can help to know what other kinds of complications you might run into while ethically trading:

Data Quality and Transparency

You can generally learn a lot about a company by doing some pretty basic research, but this is something that gets a bit complicated when you're looking at a company's social and environmental performance — whether it's because there's a lack of standardised metrics to base it on or they're reporting these sorts of stats on an inconsistent basis.

It'll depend on the company, but this ultimately means you'll probably struggle to find (or at least have to dig very deep, which can be time consuming for a trader) reliable data to inform your investment decisions.

Balancing Financial Returns and Impact

Unfortunately, it can sometimes pay to have a conscience when you're an investor, as socially responsible investment strategies can, at times, yield slightly lower financial returns in comparison to more traditional investment opportunities where you're trading assets without a care in the world.

That's not to say you're going to go broke by trading socially responsible assets only, but it can definitely help to look for a balance between sustainable companies and traditional, less ethically-oriented companies when you're building your investment portfolio.

Greenwashing and Ethical Dilemmas

As touched on earlier in the article, socially responsible investments are something that's gaining a decent amount of traction these days, and while that's ultimately a net positive for the world, it does raise a few concerns about greenwashing — the phenomena where companies either exaggerate or grossly misrepresent their environmental or social credentials in order to become more marketable for people like you are simply trying to make a difference.

As a result, you'd never want to take what a company says at face value, especially if you're investing in companies that are traditionally non-sustainable, like BP or Shell.

You'll likely discover whether or not a company is being honest when conducting your due diligence anyway, but keep this in mind if you really want to ensure their goals actually align with your values or not.

Diversification Constraints

Similarly to the earlier point, you might have a few fewer opportunities when it comes to diversification with certain socially responsible investment strategies since you're probably going to have to exclude entire industries or sectors from your investment portfolios.

If this is something you're serious about, you're most likely going to need to make some tweaks to your portfolio so you can consider the potential impact of divestment or negative screening on your overall risk and performance.

How to Get Started With Socially Responsible Investments

If you're someone who's only ever traded in traditional markets, it can naturally feel a little bit daunting when making the switch, as you don't always know the best way of marrying your financial goals with your ethical values.

So, we've put together a few steps to help you get started with socially responsible investments. Remember, it's really not that different from a technical analysis point of view — the only major difference is the research you're going to have to do in each company to ensure they're a business you actually want to invest in.

With that in mind, let’s break down some of the basics you should consider while starting out:

Clarify Your Values and Objectives

As touched on, socially responsible investing isn't just environmentally conscious investing; there are a whole host of different ESG factors. So, try to take some time to reflect on what actually matters the most to you and try to base your investment strategy around that.

Educate Yourself

While there are definitely plenty of similarities, this is obviously a fairly new approach to trading for most people reading this article, so make sure you've come to terms with some of the main principles and practices of socially responsible investing before you dive straight in and lose money.

As discussed earlier in the article, there are a few different approaches you can take here, such as positive/negative screening and impact investing, so try to understand which method resonates with you the most and do a little bit of research, and you'll be good.

Additionally, try to learn the various ESG factors and what kind of influence they can have on your investment decisions — there are plenty of resources available if you need help, even financial advisors who specialise in SRI if you've got the funds for one.

Assess Your Risk Tolerance and Financial Situation

Don't think that just because sustainable investing is for a good cause you can't still lose all your money while trading. This is probably the biggest thing this type of investment strategy has in common with traditional investing — at the end of the day, you're still going to need to be a good trader in order to make money.

Remember, too, that SRIs are still about turning a profit, so don't get too caught up in the good deed you're doing that you're making a loss — you may as well just donate to charity at that point.

So, just as you would with any other kind of investment — whether you're someone who's into crypto or you're more of a stocks and shares guy — make sure you know your risk tolerance and financial situation before making any wild investments so you know how much capital you can actually dedicate to SRIs.

As a tip, it can help to know things like your liquidity needs and overall financial goals here, but there are plenty of tools available to help you figure out how much money you can afford to spend here if you need a bit of extra assistance.

Research Socially Responsible Investment Options

So, once you've done a bit of a reflection and figured out what your values and financial goals are, simply start looking for socially responsible investment options that best align with them.

Fortunately, you've got a pretty broad range of options here, from socially responsible mutual funds and exchange-traded funds (ETFs) to impact investment opportunities and community investing platforms — so just take a look at their performance track record and fees, then add them to your SRI portfolio!

Related Guides:

FAQs

Are Socially Responsible Investments Only Suitable for Individual Investors, or Can Institutional Investors Also Incorporate SRI Strategies?

Are There Specific Industries or Sectors That Are Particularly Well-Suited for Socially Responsible Investments?

How Can Socially Responsible Investments Promote Innovation and Entrepreneurship?

What Role Do Socially Responsible Investments Play in Advancing Gender Equality and Women's Empowerment?

Are Socially Responsible Investments Financially Viable, or Do I Need to Sacrifice Some of My Potential Profits?

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