When most people of think investing, they think solely about their financial risks and returns. Not many people think about the social side of investing. However, as more people become conscious about societal and environmental issues, a new trend of social investing is gaining ground in the marketplace. Socially responsible investing (SRI) is approximately $2.7 trillion out of the $25 trillion invested in the United States marketplace. It also accounts for a large range of investment opportunities including: stocks, bonds, mutual funds, savings and checking accounts, and venture capital opportunities.
Individuals who practice socially responsible investing consider the nature of the business before making their investment, trying to avoid companies that market harmful products and services such as alcohol, gambling, and tobacco, among others. Socially responsible investors usually seek out companies that are associated with green technology, renewable energy, environmental sustainability, and community improvements.
Many people find socially responsible investing to be morally worthwhile. Individuals often find a connection between their social values and their wish to earn money. They find it good to invest in and support a company, allowing them to further their social goals. Another benefit is investors are able to carry out their own goals on a much larger scale through investing in certain companies. They may feel limited in their personal actions, and may see socially responsible investing as a way to benefit society.
Investors use several points to identify socially responsible companies. They typically use screening tools to remove investments that do not meet their criteria for being socially responsible. Common negative screening disqualifiers include “sin stocks,” and unlawful or immoral behavior. Some mutual funds go as far as only selecting companies that align with certain religious ideology, or companies that have positive environmental track records. Not all investors have the same screening process. The information used to screen companies can be as strict or forgiving as the investor wishes.
When configuring your investing strategy, you will need to figure out your own personal parameters. Some investors have zero tolerance for companies that engage in the creation or distribution of alcohol or tobacco. On the other hand, some investors are more lenient in their approach. For example, a socially responsible investor may be very interested in a wind farm or solar power company since that fits the traditional definition of a socially responsible investment.
SRI does not guarantee that investors will make good returns. Still, a growing number of studies have shown that investors are earning competitive financial returns. Recent academic studies have shown that socially responsible mutual funds perform competitively with some of the non-SRI mutual funds.
Some of the major SRI indexes, such as the KLD 400 and the Calvert Index, perform comparably with major indexes. Another sign that socially responsible investments are offering good returns is the rapid growth of these investments in recent years. Coupled with that is the increase in socially responsible investments by state pension funds, university endowments, and foundations.
Because of these competitive returns, there is no shortage of investors in socially responsible companies. SRI is still a niche product but is gaining in popularity. Institutional investors who have certain religious, social, cultural, political, and personal views are leading the pack. There is a constant expansion of the number of assets that fit into the classification of socially responsible investments. There are over 260 socially responsible mutual funds, with the community investment area seeing the fastest growth.
Like any investment, socially responsible investments should be thoroughly researched before determining which one to purchase. It is important to ensure the investment meets your social views, as well as offers the best financial return possible. If financial returns are not important to you, selecting investments will be much easier. A mutual fund or an exchange-traded fund, will give you the opportunity to support various companies that fit your social goals. As the importance of green technology and renewable energy continues to grow, SRI will continue to expand. Expect to see SRIs make up a larger portion of investment opportunities in the United States in the coming decade.
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