Ethically and Ecologically Responsible Investing

Wilfrid Baptiste

If you're interested in investing, but are reluctant to fund companies whose practices you disagree with (either on moral, ethical, or environmental grounds), it's probably worth pointing out to you that you have options. And those options are related to the concept of Socially Responsible Investing, or SRI.

Portfolio managers that are involved in SRI (also known as green portfolio managers) tend to direct the funds that they're managing toward competitive public companies that are meeting a certain number of conditions that have been previously set and depend largely on the particular firm's ideals. Most of the time, the criteria include companies that are building a more bio-sustainable human economic infrastructure based on renewable energy, energy efficiency, organic foods and products, recycling, and technologies that have a minimal impact on the environment.

Companies that have met those standards and have earned the "socially responsible" tag have already attracted over $2 trillion in funding from investors. On the international scene, socially responsible investing (SRI) is growing at the healthy clip of more than 10% per year. If you take a look at most SRI portfolio managers and the strategies they use, you'll see that they put in place screens that eliminate publicly-traded companies that produce "bad things", which are products and/or services that are deemed undesirable (alcohol, tobacco, weapons, pornography, and pollution). SRI portfolio managers also use other screens that check for a company's record on human rights, women's rights, worker rights, animal rights, and so on.

Thankfully, out of the myriads of companies out there, there are some that can meet a socially responsible investor's desire for healthy financial returns, while at the same time protecting the environment and building an environmentally sustainable economic infrastructure. For example, renewable energy is one of the sectors growing at a torrid pace right now. While its rate of growth is hovering around 25% per year in the U.S., it is even greater in the European Union and parts of Asia.

Of course, socially responsible investing carries its own sets of risks. Buying shares in individual green companies (or even in green funds) is probably riskier than investing in an index fund for example. The reason is that, by definition, SRI excludes some sectors, and in turn that affects your portfolio's diversification. The flip side of the coin is that where there is risk, there is usually greater opportunity for return. Your best bet is to look for "no load" green funds, which are funds that don't carry a sales charge. Also, if you're considering investing into a fund that claims to go the SRI route, it's a good idea to actually take a look into its holdings to see whether they walk the walk or whether their claims of social responsibility are nothing more than a hollow sales pitch. In short, in order to succeed as a socially responsible investor, you need to make informed decisions, seek diversification, and keep your costs low.

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About the Author:
I maintain a personal finance blog where I talk about socially responsible investing and how to become a millionaire, among other topics