Investing in the stock market allows you to build wealth over your lifetime, but can it also help change the world?
Choosing to invest in stocks that support your personal social or religious philosophies may have a long-term impact on the issues you care about while also helping to build a better future for your children and grandchildren.
So why doesn’t everyone invest this way?
This article helps you understand socially responsible investing (SRI) and weigh the pros and cons of putting your money where your values are.
Keep reading to understand what SRI is, and determine whether building a portfolio of socially responsible investments might be a good approach for you. Make sure to keep your investing foundation up to snuff with our article on how to buy stocks for beginners. Doing so will help you avoid major pitfalls and do things right.
What Is Socially Responsible Investing (SRI)?
Socially responsible investing means that you consider both the financial performance and social implications of companies before investing in them.
ESG investing, impact investing, and faith investing are the three most common types of SRI.
What Is ESG Investing?
ESG investing is a subset of SRI. It considers three criteria before determining what companies to invest in:
- Environmental impact
- Social impact
- Corporate governance
Unlike impact or faith-based investing, ESG investing’s primary purpose is financial gain.
ESG investing considers how environmental, social, and corporate governance policies or behaviors might affect a company’s profits over time.
The term “ESG” is often (mistakenly) used interchangeably with SRI, however, ESG is a subset of SRI.
The primary difference between ESG and other socially responsible investing is its motivation, which is to earn a profit.
Other types of SRI, such as impact and faith investing, are driven by the desire to make positive change.
What Is Impact Investing?
Impact investors put their social goals above or equal to their financial goals to provide capital where they believe it can positively influence social or environmental issues.
Impact investing is a 715 billion dollar market that’s relatively new but growing steadily.
As millennials move further into adulthood, more and more are beginning to invest in their future by purchasing stocks and index funds.
The purpose-driven generation is more likely than any before to consider social impact as a priority when wealth-building:
- Nearly all millennials (90%) believe companies must act to help social and environmental issues. Three-quarters of them will investigate to learn whether a company demonstrates honesty when taking a stand on issues.
- The majority of millennials (73%) are less likely to “cancel” a purpose-driven company.
With social change dominating much of American consumerism, and many of today’s social impact investors (88%) meeting or exceeding their financial goals with impact investing, this approach will likely become more common in the coming years.
On the flip side, traditional stock market investing strategies often involve people aiming to build a steady portfolio of funds that generate enough profits over time to allow them to retire comfortably.
SRI investors look beyond a company’s finances to understand how its actions may affect the causes they care about.
To get started with impact investing, you can create your own “pie,” or collection, of companies that support your causes.
Or, you can choose an Index fund that already supports a cause that matters to you.
For example, SPDR SSGA Gender Diversity Index ETF (SHE) tracks the performance of companies that demonstrate the advancement of women to senior leadership and board of director positions, such as:
- Visa (V)
- Home Depot (HD)
- Johnson & Johnson (JNJ)
- PayPal Holdings (PYPL)
Impact investing doesn’t have to be complicated or expensive.
When you open an account at M1 Finance, you can customize your portfolio by creating your own collection of investment choices or combining them with expert “pies.”
You don’t have to be rich to invest in stocks, especially if you use M1 Finance as your brokerage firm.
M1 Finance lets you open an investment account with as little as $100, and its minimum deposit requirement is just ten dollars and one cent. Plus, its visual approach to investing, with colorful pie charts and plenty of training resources, allows beginners to learn as they go.
What Is Faith-based Investing?
Faith-based investing involves building financial portfolios that support personal religious convictions.
Faith-based investment strategies focus on wielding financial power to adjust society’s behavior to a given set of religious values or to support businesses that practice like religious ideals, whether or not it builds wealth.
Faith-based investing is a strategy mostly used as a way to further the influence of one’s religious beliefs rather than a path to building wealth.
ESG, impact, and faith-based investing are three ways people practice socially responsible investing.
Pros and Cons of SRI
If you’re considering socially responsible investing, understanding the basic pros and cons may help you determine when and how to get started.
- Impact and faith-based investors may help shape the future of societal behavior.
- ESG investors may generate higher profits by analyzing social, environmental, and corporate behavior.
- Ideally, most SRI strategies provide a way for investments to serve two functions: profit and social change.
- SRI is no longer a brand new concept, but instead is growing steadily and providing improved financial results to many of its investors.
- Finding companies that truly support their claims of social impact, and are honest about their efforts, poses a challenge. Many create a lot of hype for marketing purposes without concern for making a real impact.
- Measuring the impact of your investment’s social change is challenging, maybe even impossible. There’s a strong need for tools that help investors accurately gauge the impact of their investments.
- Financial returns on SR investments may suffer compared to investments you choose based solely on financial motivations. You may need to sacrifice some or all of your potential profit in order to affect change, depending on which SRI strategy you choose.
If you’re wanting to get started with socially responsible investing, you can begin by allocating a portion of your investment funds into companies you want to support.
M1 Finance is rated one of the top outlets for SRI, thanks to its low costs (no fees, plus you can open an account with only $100) and sophisticated, but simple, investing tools.
For example, at M1Finance, you can build an investment “pie” that includes socially responsible stocks and ETFs.
The first step toward socially responsible investing is researching companies to discover which ones you’d like to support.
You might want to check ou Finra’s ESG Investing report or Visual Capital’s America’s Most Responsible Companies in 2021 report to start learning more about what companies and index funds might interest you.
Investing In Your Future With A Dual Purpose
The SRI subset ESG incorporates environmental, social, and corporate considerations before investing in a company, to earn better profits.
Impact investing allows your money to (hopefully) do double-duty as both a financial investment tool and a path to make critical social and environmental change.
Faith-based investing prioritizes religious beliefs over long-term financial gains to sway societal behavior toward specific religious values.
Since socially responsible investing is relatively new, you may need to spend some extra time researching the validity of a company’s corporate social policies before investing in them.
There’s a lot to learn about investing, but it can be a whole lot of fun if you jump in and get started on a small scale before making big money decisions.
Fortunately, you can learn as you go when you open a stock brokerage account with a company that caters to beginners — even those on a budget.
M1 Finance is an excellent way to begin investing because it charges no fees, allows you a high level of freedom and control over your investments, and helps you learn with visual charts and other helpful library resources.