Social investing, also known as Socially Responsible Investing (SRI), has been growing in popularity for a number of years. Simply put, social investing is directing your investments toward companies that align with your beliefs and causes that are important to you. It can also mean directing investments away from companies that don't act in accordance with your beliefs.
For example, if you are someone who is concerned about climate change and wants to support environmentalism, social investing might mean investing in companies that are involved in green, sustainable energy. It could also mean directing money away from companies that engage in unsustainable environmental practices, such as coal or natural gas extraction.
In the past several decades, social investing has encompassed a large number of platforms, including social justice, health, community involvement, food insecurity, political causes, sustainability, and even religious beliefs.
At Scarborough Capital Management, we are asked about social investing often, as more and more investors look for ways to make a change.
If putting your investment dollars toward companies that are engaged in practices you want to see further appeal to you, below are 3 steps to get started.
Step 1: Think Through Which Causes You Want to Align With
If social investing appeals to you, think carefully about which causes you to want to align with (or disinvest from). It’s not always a simple decision, for several reasons.
Many conglomerates and multinationals are involved in many different sectors. It’s not always easy to disentangle their businesses in terms of social impact. A given company may be engaged in environmentalism such as recycling materials, for example, but be involved in other sectors that do not align with your other beliefs, such as burning fossil fuels.
For this reason, one of the major trends in social investing is aligning investments with Environmental, Social and Governance (ESG) factors rather than only the products and services organizations produce. ESG can be used as a tool to establish which company managements support the causes you would like to support.
Step 2: Don’t Forget You’re Investing!
Always remember that social investing is investing! It has the same goal as any other investment, which is to allow your investment to grow in the future, or pay you future income through dividends and interest.
As with any other investment, it’s important to diversify and make prudent choices. It’s never smart to put too many eggs in one basket. Social investing choices are subject to the same market and economic trends as all other investments.
Let’s say that you invest heavily in solar power, for example. The solar power sector can be subject to downturns for many reasons, including increased competition from within that sector, competition from alternative sectors, such as wind energy, or problems with meeting supply. If you decide to invest heavily in solar power and the sector hits a prolonged downturn, you can find your investment goals not being met.
If you want to support a socially responsible cause you feel passionately about but the investment outlook won’t support a strong investment, consider making a charitable contribution instead. Just don’t confuse the goals of investing with the goals of charitable contributions. (Read this blog post first: Before Giving to Charity, Ask Yourself These Questions.) Your investment strategies are usually focused on helping you work towards your financial and personal goals. The goal of charitable contributions is to support organizations engaged in causes you deem worthy.
Step 3: Work with a Financial Advisor
Talk to a financial advisor about social investing. Your financial advisor can help coordinate your goals with your investments and work with you on a strategy that is diversified and appropriately allocated for your specific goals and criteria.
There are certain investments that can make social investing easier. There are Exchange Traded Funds (ETFs), for example, that are dedicated to social investment. But like any generalized asset sector, these may or may not be the best opportunity for you. A review with a financial advisor can help you make this determination.
Again, social investing should be reviewed at least once per year, to be sure your asset allocation hasn’t veered too far from your intended allocation. A financial advisor can also help you stay up-to-date with evolving laws, rules, and regulations about social investing and what it means for your portfolio and goals.
Late last year, for example, the U.S. Department of Labor issued a new regulation that may affect social investing in retirement plans. With the regulation, fiduciaries must choose retirement investments with specific consideration to how the investments do financially.
On the surface, this may not seem like that much of a change. Fiduciaries are always mandated to make investments and other choices in accordance with your best financial interests. But because social and ESG investing historically has evaluated social factors as well as financial performance, it is possible that this regulation could reduce or eliminate them as investment choices in retirement plans.
Because the regulation went into effect in October 2020, it is still relatively recent and its impact is not completely clear. It is prudent to discuss your situation with a financial advisor who understands the markets and these effects.
If you’re not currently working with a financial advisor or feel it’s time to make a change, schedule a no-obligation conversation with the Scarborough Capital Management team. Headquartered in Annapolis, MD, Scarborough Capital Management has been helping busy people nationwide make the most of their money for more than 30 years. With affordable 401(k) management services plus full-service financial planning and wealth management, our financial advisors are passionate about helping clients work towards their financial goals, now and in the future. Learn how we can help you too.
Impact investing and/or Environmental, Social and Governance (ESG) takes into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values-based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.
