Written by Mark A. Vergenes
Investing with an eye toward promoting social, political, or environmental concerns (or at least not supporting activities you feel are harmful) doesn’t mean you have to forgo pursuing a return on your money. Socially responsible investing may allow you to further both your own economic interests and a greater good, in whatever way you define that term.
By monitoring your investment’s performance, and being prepared to look elsewhere if your investment doesn’t continue to meet your needs, you increase your chances of selecting appropriate investments. Here are some tips to help you evaluate investments through the lens of social responsibility.
1. Screening potential investments.
Evaluating investments based not only on their finances but on their social, environmental, and even corporate governance practices is a common approach. Screens based on specific guidelines may eliminate socially unacceptable investments. Often socially responsible funds exclude companies involved with alcohol, tobacco, gambling, or defense. Other funds avoid companies that contribute to environmental pollution or that have significant interests in countries considered to have repressive or racist governments.
You can also employ positive screens to identify companies whose practices actively further a particular social good, such as protecting the environment or following a particular set of religious beliefs.
2. Community investing.
Another approach involves directing investment capital to communities, projects, and non-profits that may have difficulty getting traditional financing. Investors support organizations that help traditionally underserved populations with challenges such as gaining access to affordable housing, finding jobs, and receiving health care. Community investing often helps not only individuals but small businesses that may operate in geographic areas that mainstream financial institutions deem too risky.
3. Impact investing.
Impact investing focuses on measuring and managing performance in terms of social benefit as well as investment returns. This type of investing aims to further a social good in ways that maximize efficient use resources. In fact, some have made a case for considering impact investing an emerging alternative asset class. Impact investments are often made directly in an individual company or organization, and may involve direct mentoring of its leaders. As a result, such unique investments may be more similar to venture capital and private equity (where the concept of impact investing originated) and may not be highly cor – related with traditional assets such as stocks or bonds. Should you cast a wide net or target your investments?
One of the key questions for anyone interested in socially responsible investing is whether to invest broadly or concentrate on a specific issue or area. A narrow focus could leave you overly exposed to the risks of a single industry or company, while greater diversification could weaken the impact that you might like your money to have.
A broad scope can make it difficult to choose among the myriad investment opportunities, especially if you don’t have expertise about a particular field or the time or energy to acquire it. However, unless you’re familiar with the science behind a specific company’s product or service, you might benefit from casting a wider net. Though diversification and asset allocation can’t guarantee a profit or eliminate the possibility of loss, they can help you manage the amount of risk you may face from a single source.
If you don’t have the time to do detailed research or don’t trust your own judgment, you could work with an adviser who may have access to more information about your area of interest.