Socially Responsible Funds: Where To Invest Your Money?

Socially responsible investing (SRI) is an investment strategy that aims to generate both social change and financial returns. SRI investors pay attention to corporate governance, environmental impact, and human rights, among other factors. These investments can be made into individual companies with good social value, or through a socially conscious mutual fund or exchange-traded fund (ETF).

SRI has gained popularity in recent years, with a 2019 Morgan Stanley survey finding that 85% of individual investors are interested in sustainable investing. This shift in investor preferences has led to a growing number of SRI funds, with a range of different focuses and investment strategies.

When considering which type of socially responsible fund to invest in, it is important to keep in mind that these funds are still investments and to weigh the potential for financial returns. It is also crucial to research the funds carefully and align them with your values and financial goals.

Environmental, Social and Governance (ESG) criteria

ESG criteria are made up of seven key areas of focus:

• Corporate governance and ethics
• Environmental concerns
• Product safety and impact
• Indigenous people's rights
• Workplace practices
• Company values
• Employee diversity

These criteria are used to assess a company's management practices and whether they tend towards sustainability and community improvement.

When it comes to environmental concerns, for example, investors might look for companies that are helping with decarbonization efforts and fighting climate change. In terms of social criteria, investors might seek out companies that are committed to social justice, racial justice, equality, and inclusion. Governance criteria might include a focus on solid management practices and a commitment to sustainability.

ESG-focused funds are becoming increasingly popular, with one source stating that as of 2024, one in four dollars under professional management in the US is invested with socially responsible investment strategies, totalling more than $17.1 trillion. This trend is likely to continue, with national governments poised to increase spending on decarbonization efforts.

It is important to note that not all ESG funds are the same, and some may be more aligned with your values than others. It is also worth considering the fees associated with these funds, as they can vary and may be higher than those of traditional funds. However, there is evidence that ESG funds can perform just as well, if not better, than conventional funds.

Socially Responsible Mutual Funds

When choosing a socially responsible mutual fund, it is important to determine which factors are most important to you. Funds with a strong sensitivity towards environmental issues, for example, will pick stocks in companies that go beyond fulfilling minimal environmental requirements. Socially responsible funds may also focus on company values, employee diversity, community support, governance issues, religious values, and human rights practices.

Some common approaches to ESG include:

• Values-based investing or negative screening, which focuses on excluding companies from the portfolio that do not align with the investor's values.
• Integration, which considers environmental, social, and governance (ESG) risks in the investment process and selects companies that score well on material ESG issues.
• Impact investing, which involves deploying investment dollars to directly achieve a desired outcome, such as fighting climate change or promoting renewable energy development.
• Parnassus Endeavor Investor (PARWX): This fund was founded in 1984 and eliminates companies involved in alcohol, gambling, tobacco, and fossil fuels. It returned 5.82% in 2023.
• Vanguard FTSE Social Index Fund Investor Shares (VFTSX): This fund has screens for alcohol, tobacco, pornography, nuclear energy, and military sales. It also looks for companies with diversity in the workplace and a strong human rights record. It returned 15.59% in 2023.
• Invesco ESG NASDAQ 100 ETF (QQMG): This ETF must meet Nasdaq's ESG criteria, excluding companies involved in alcohol, cannabis, controversial weapons, gambling, nuclear power, oil, gas, and tobacco. It returned 38.40% in 2023.
• IShares ESG Aware MSCI USA ETF (ESGU): This fund holds large U.S. stocks that get favorable environmental, social, and governance ratings, including Microsoft and Nvidia. It has $12.7 billion in assets under management and a 0.15% expense ratio.

Racial Justice Investing

RJI recognises the influence and power of institutional investors in financial markets and their contribution to and benefit from structurally racist systems. It offers an introspective space for investors to address individual and institutional responsibility and work with impacted communities to shift policies, practices, and products towards racial equity.

Individual retail investors can also engage in racial justice investing by researching and investing in stocks that align with these causes. Additionally, they can invest in racial justice-focused exchange-traded funds (ETFs) like the Impact Shares NAACP Minority Empowerment ETF (NACP), which has the backing of the National Association for the Advancement of Coloured People (NAACP).

Some institutional investors are taking action by signing racial justice pledges, such as the 2020 Belonging Pledge and the Investor Statement of Solidarity to Address Systemic Racism and Call to Action. They are also focusing on increasing racial diversity and inclusion within their organisations and promoting supplier diversity.

Manager selection is another way to foster racial justice, with studies showing that funds managed by diverse-owned firms outperform their peers. Investing in companies with diverse corporate boards has also been linked to higher earnings growth.

Negative screening can also be used to exclude companies that exacerbate racial injustice, such as financial institutions with predatory lending practices or those involved in the prison-industrial complex.

Impact Investing

The point of impact investing is to use money and investment capital for positive social results. Impact investors consider a company's commitment to corporate social responsibility and its duty to positively serve society as a whole. This strategy can involve various types of asset classes, including stocks, bonds, mutual funds, or microloans.

There are two main approaches to impact investing: socially responsible investing (SRI) and environmental, social, and governance (ESG) investing. SRI investors may avoid companies involved in alcohol, tobacco, or firearms production and sales. In contrast, ESG investors look for companies with ethical governance, a focus on worker well-being, and a commitment to positive environmental outcomes and sustainable business practices.

Impact investments can be made in both emerging and developed markets, targeting returns ranging from below market to market rate. According to the Global Impact Investing Network (GIIN), the majority of investors who choose impact investing seek market-rate returns. Impact investing is particularly appealing to younger generations such as millennials and Gen Z, who want to give back to society.

Some examples of impact investing include:

• The Gates Foundation: Launched by Bill & Melinda Gates, the foundation has a strategic investment fund with over $2.5 billion under management, invested in ventures that align with its goals of improving health, education, and gender equality.
• Soros Economic Development Fund: Part of the Open Society Foundations by George Soros, this fund seeks to support "open societies" by promoting democracy, legal reforms, higher education, and journalism.
• The Ford Foundation: Announced plans in 2017 to invest $1 billion in business ventures aligned with their mission, including causes such as renewable energy and affordable housing.

Community Investing

There are community investment opportunities for all levels of investors. Popular options include depository institutions such as community development banks and credit unions. However, there are also opportunities to invest in fixed-income and private equity products.

In the United States, there are several types of Community Development Financial Institutions (CDFIs), including community development banks (CDBs) and community development credit unions (CDCUs). These institutions provide capital to underserved communities through various financial products, including personal credit and business loans. As of 2019, there was roughly $141.2 billion invested in CDFI-certified institutions.

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