When you decide to make a stock investment, do you care if your money is invested in stocks that are considered socially responsible? Do factors such as how the company treats its employees or its use of toxic chemicals in the manufacturing process influence your decision to invest in the company or not?
Socially responsible investing, also called sustainable investing, is when you invest your money in companies that truly contribute to the greater good of society – whether it’s helping its own employees, making an effort to clean up the planet, or taking action steps to solve world problems.
Successful investing requires a long-term commitment. It’s more than just avoiding owning stocks of tobacco companies or payday lenders, these investors look at three key factors when deciding where to put their money – environmental, social, and governance (ESG). If you are an ESG investor, you want to know:
Environmental - What is the company’s impact on the environment? Does it implement green energy initiatives? How does it handle carbon emissions, waste management, and water pollution?
Social - How does the company treat its employees? Does it have sexual harassment policies? Does it practice diversity and inclusion and fair labor practices? What is its record on human rights?
Governance - How diverse is the company board and executive team? What political contributions does the company make? How do its existing shareholders feel?
But socially responsible investing goes beyond the ESG factors of a company. Other strategies considered for sustainable investing include:
Impact investing - Impact investing is when you invest in companies that are focused on making a social and environmental impact. For example, investing in electric car companies like Tesla or sustainable agriculture companies like Bioceres Crop Solutions.
Activist investing - An activist investor buys a large amount of stock in an underperforming company to influence the company and its management to take specific steps to increase its share value.
Socially Responsible Investing Isn’t a Fad
Once considered a niche investment strategy, socially responsible investing is now considered more mainstream, especially with millennials and women. According to Morningstar’s Sustainalytics, $70 billion was invested in ESG funds in 2021. That’s about 14 times more than three years ago. The number of sustainable funds and ETFs available to invest in has also grown three times more than what was available three years ago.
As this momentum grows, women continue leading the socially responsible investing movement. A recent Cerulli Associates poll found that 52% of women preferred investing according to their values by owning shares in companies that have a positive social or environmental impact track record, compared to 44% of men.
And Returns? You Can Make Money and Make a Difference.
You don’t need to be a hippie to jump on the socially responsible investing bandwagon. You also don’t have to sacrifice investment returns to invest sustainably. Over the past couple of years, socially responsible funds have performed just as well, if not better, than conventional funds. S&P Global Market Intelligence analyzed the performance of 26 ESG exchange-traded funds (ETFs) and mutual funds during the first 12 months of the COVID-19 pandemic and found that 19 performed better than the S&P 500.
Socially responsible investing is also becoming much more accessible to individuals. In fact, you might now find ESG funds added to your own 401(k) plan. The U.S. Department of Labor has proposed a regulation that would enable fiduciaries to consider ESG factors when they select the investments for your employer’s retirement plan.
The number of opportunities to invest in stocks of companies deemed socially responsible, and in a low-cost way, is expanding. These are just a few ETFs to consider if you’re interested in socially responsible investing.
iShares Global Clean Energy ETF (ICLN) - This ETF includes companies worldwide that produce “clean energy” from solar, wind, and other renewable sources. Holdings include Enphase Energy Inc., SolarEdge Technologies Inc, Vestas Wind Systems, Plug Power Inc., and First Solar Inc.
Shelton Green Alpha Fund (NEXTX) - Green economy companies that “improve human well-being and increase economic efficiencies, while significantly reducing environmental risks and ecological scarcities” are included in this ETF. Holdings include Tesla, Moderna, Applied Materials, IBM, and JinkoSolar Holding Co. Ltd.
AllianceBernstein Sustainable Global Thematic Fund (ATEYX) - This fund identifies sustainable investment themes that are broadly consistent with achieving the United Nations Sustainable Development Goals, such as health, climate and empowerment. It holds 30 to 60 stocks, including Waste Management Inc., Deere & Co., Microsoft Corp., and Apple Inc.
iShares ESG Aware MSCI EAFE ETF - This fund exposes you to large- and mid-cap stocks in Europe, Australia, Asia, and the Far East that have favorable ESG ratings. Holdings include Nestle SA, Roche Holding Par Ag, Shell PLC, Novartis AG, AstraZeneca PLC, and Toyota Motor Corp.
First Trust Global Wind Energy ETF (FAN) - This ETF focuses on wind energy companies around the world. Companies included are actively engaged in some aspect of the wind energy industry, such as the development or management of a wind farm, production or distribution of electricity generated by wind power, or involvement in the design, manufacture or distribution of machinery or materials designed specifically for the wind energy industry. Holdings include Northland Power Inc., Vestas Wind Systems, Engie, Boralex, and Innergex Renewable Energy Inc.
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