Socially responsible investing (SRI) is a growing phenomenon, especially among younger investors. The approach considers a company’s practices regarding sustainability and diversity into account when making an investment decision. Interest in a company’s social and environmental track record has led investors into taking their pick of a growing range of relevant SRI index and mutual funds.
Socially responsible investing
Socially responsible investing is also known as ESG investing, because of its focus on a company’s environmental, social, and governance practices. While it may give seem a bit trendy, it’s now a well-established practice, having overcome concerns on the profitability of prioritizing social responsibility.
On average, SRI has been shown to have equal average returns compared to other kinds of investing. A long-term analysis revealed that “European and North American stock portfolios with high E, S, and G scores show a significant financial outperformance in the long run.” For active investors, “investing in the top stocks and shorting those with low E, S, G scores implies even higher abnormal returns.”
In addition, the ongoing growth of SRI reflects the strength of individual brands, which in turn, increase returns over the long-term. Millennials have shown a particularly strong attraction to SRI — 28 percent of millennials expressed interest in SRI in 2015. By 2017, this number rose to 86 percent and 38 percent claimed to be “very interested.” Thanks to this, a variety of index funds, ETFs, mutual funds and even robo-advisor portfolios have been developed for such investors.
Evaluating SRI funds
SRI funds add at least one more layer to evaluating possible investments. In addition to the traditional bottom line, SRI fund managers may consider one or more of the following factors when evaluating which stocks to include:
- Workplace practices.
- Diversity practices.
- Community support.
- Environmental concerns.
- Human rights.
For example, one of the most popular SRI funds is the SPDR SSGA Gender Diversity Index ETF (SHE) based on the SSGA Gender Diversity Index. This index focuses on “US companies that demonstrate greater gender diversity within senior leadership than other firms in their sector.” Three gender diversity ratios are used to rank companies within each sector.
SHE managers look at thousands of the largest U.S. firms and rank them for their ratio of women executives and board members. For a company to be included in the fund, it must have at least one female board member or a woman as CEO. The top 10 percent of such companies are then added to the fund.
After managers have their say, investors must decide if the fund meets their personal requirements. So, if one considered environmental factors to be another key concern, then some of SHE’s picks might not make the cut. Fortunately, a wide range of SRI funds is now available with options including both single-issue and multi-issue approaches.
SRI fund examples
Some of the more noted SRI funds among financial writers and experts include:
TIAA-CREF Social Choice Bond Fund (TSBIX) — As a bond fund, TSBIX is rather unique, with around 80% of holdings in bonds and fixed-income securities. Management focuses on environmental and social impact measured by such factors as the “bond issuer’s commitment to…development of resources available to low-income and historically underserved communities and populations.”
SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) — SPYX is another unique fund that eliminates “companies that own fossil fuel reserves from the S&P 500.” It is designed for investors who desire S&P 500 exposure but are also “interested in eliminating fossil fuel reserves from their portfolio.”
The majority of the SRI funds attracting attention are exchange-traded funds (ETFs) but mutual and bond funds are also available. In making one’s choices among funds, be sure to consider the differences of each fund type, in addition to SRI screening requirements. It may sound complicated but it ultimately comes down to two concerns: what you care about and what you need financially. With new fund options continuing to appear, there should be plenty of options that fit your needs.
(Featured image by DepositPhotos)
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