Socially Responsible Investing: 4 ways to invest according to your values

Socially responsible investing (SRI) is a strategy that tries to generate social change as well as financial returns. SRI is often used interchangeably with values-based investing, sustainable investing, and ethical investing.

Four approaches for pursuing SRI are impact investing, thematic investing, exclusionary investing, and ESG investing. Here’s a breakdown of each approach.

Impact Investing

Impact investing is focused on producing a specific positive social or environmental impact while earning back the initial investment or turning a profit.^[1] Central to impact investing is the concept of “additionality”: the thought that social benefits would not come about without the investment. The most well-known form of impact investing is micro-loans, which were developed by Mohamed Yunus in response to the 1974 famine in Bangladesh. He founded Grameen Bank to award loans to entrepreneurs too poor to qualify for traditional loans. This innovative approach to lifting people out of extreme poverty was so successful that Yunus and Grameen Bank were jointly awarded the 2006 Nobel Peace Prize.

Another sector that’s benefitted from impact investing is for-profit grocery stores in food deserts which aim to provide high-quality, fresh food at affordable prices to poorer communities. These seek to address the myriad of health and social problems stemming from unequal access to healthy food, while also profiting financially. One such successful business is Everytable. Everytable opened its first location in Compton, Los Angeles, in 2016 and now has more than twenty locations across the city, made possible in part by its Social Equity Franchise program.

Of the four approaches to SRI, impact investing is the least accessible to casual investors because it involves large sums of money and investors usually get involved in the venture’s ownership. Most often the funds come from big institutions. In the case of Yunus and Grameen Bank, the key investor was the government of Bangladesh. Everytable’s key initial investor was Acumen, a global nonprofit impact investment fund. Everytable’s Social Equity Franchise program was made possible by a $1 million grant from grocery store chain Kroger.[2]

Thematic Investing

Thematic investing is an investing approach where one invests broadly in a concept, rather than targeting specific companies.[3] As explained by the financial services company Charles Schwab:

“Thematic investing is an approach that uses research to identify trends, opportunities, and relevant companies and group them into overarching themes to invest in. In contrast to sector investing, themes include investments that span many sectors, such as the Workforce Diversity Leaders* theme — bringing together a variety of companies from tech, retail, gaming, hospitality, and more.”

*The Workforce Diversity Leaders theme is Schwab’s thematic lists of stocks.

Thematic investing is a traditional investment strategy as well as a SRI approach,[4] the difference is the priority of objectives. For example, several years ago I bought shares of a 3D printing exchange traded fund (ETF). 3D printing has the potential to do tremendous social good as well as harm: it’s being used to print affordable housing and untraceable weapons. My main consideration in investing was financial returns. To invest thematically in a socially responsible manner, invest in trends you want to flourish in the future. Common investing trends for this approach are renewable energy, electric cars, food chain disruptors, and plastic-alternatives.

The basis of thematic investing is an assumption a trend will grow in value, without a good guess as to which companies will come out on top. ETFs and mutual funds are investment tools well suited to this kind of investing, and there are already mutual funds and ETFs for almost every theme imaginable. You can also build your own thematically-designed investing portfolio by buying stocks of multiple companies in a specific space. Mutual funds, ETFs, and company stocks come in all prices and with few barriers to entry, making thematic investing more accessible to individual investors than impact investing.

Exclusionary Investing

Exclusionary investing is excluding or removing from your portfolio industries or companies that go against your values. It is the most simple and accessible SRI approach. Common categories that are screened out relate to:

Alcohol, tobacco, and other drugs
Gambling
Production of weapons and defense tools
Terrorism affiliations
Human rights and labor violations
Environmental damage[5]

To start exclusionary investing, check out the nonprofit As You Sow. Their “Invest Your Values” tools for checking how heavily major funds are invested in these areas were ranked most comprehensive SRI tools by Kiplinger, a finance and business publication.[6]

ESG Investing

ESG stands for environment, social, governance. ESG investing considers companies’ performance on these metrics, as well as financials, when deciding whether to invest. Companies and the finance sector are rapidly adopting ESG metrics, both for their social and risk management value. For a comprehensive overview of ESG investing and how to get started, click here.

[1] https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing

[2] https://uncoverla.com/2021/02/18/everytable-opens-healthy-fast-food-cafe-hollywood/

[3] https://www.whatinvestment.co.uk/what-is-the-thematic-approach-to-esg-investment-2617851/

[4] https://www.winvesta.in/blog/thematic-investing/

[5] https://www.investopedia.com/financial-advisor/esg-sri-impact-investing-explaining-difference-clients/

[6] https://www.kiplinger.com/investing/esg/603706/esg-tools-for-sustainable-investors