Broker Check
What Does Socially Responsible Investing Look Like?

What Does Socially Responsible Investing Look Like?

| October 26, 2023

Traditional investing is solely focused on maximizing returns. Socially responsible investing, however, aims to align returns with the investor’s ethical values. As awareness grows around how investment decisions impact society, an increasing number of people want their money to reflect their principles. 

Socially conscious investors screen potential investments based on environmental, social, and governance criteria. Here, you’ll explore what socially responsible investing looks like in active practice.

Environmental Screens

Environmentally minded investors favor companies with sustainable business practices that protect the planet. Important criteria include:

  • Reduction of carbon emissions and adoption of renewable energy
  • Responsible waste and water management
  • Clean operations that minimize pollution
  • Sustainable supply chains and materials sourcing 
  • Disclosure of environmental impact

Companies dedicated to going green through their products and practices align well with many ethical investors’ values.

Social Issue Screens

Many investors now evaluate how companies approach major social issues as part of their responsible investing approach. They might screen companies for the following:

  • Racial justice and diversity policies
  • Equitable labor practices and fair wages
  • Favorable employee benefits and workforce development
  • High product safety and security standards
  • Responsible marketing practices
  • Corporate donations that support disadvantaged groups
  • Supply chain oversight guarding against child labor and forced labor

Seeking out companies that promote diversity, pay fair wages, support communities, and address other social issues allows values-based investors to back organizations that share their priorities.

Corporate Governance Factors

Responsible investors also consider corporate policies and leadership. Key factors include:

  • Board diversity and independence
  • Executive compensation structures
  • Political spending and lobbying practices
  • Tax strategies
  • Transparency and external audits
  • Data privacy and security policies
  • Business ethics and fraud prevention
  • Regulatory and legal compliance

Companies with shareholder-friendly governance, accountability, ethical conduct, and prudent policies appeal to investors focused on responsibility.

Negative Screens

Some socially responsible investors employ negative screens to restrict their involvement in certain objectionable sectors and activities. Common areas avoided include:

  • Fossil Fuels: Oil, natural gas, and coal companies are top targets for divestment due to their massive carbon footprints and environmental impact
  • Firearms Manufacturing: Investors may choose not to invest in companies that produce firearms due to concerns over gun violence
  • Tobacco Production: Investors may avoid tobacco companies due to misleading marketing practices and the sale of addictive, carcinogenic products
  • Gambling Establishments: Some investors see gambling as exploitative and avoid casino operators, horse and dog tracks, and sports betting outlets on ethical grounds
  • Private Prisons: Controversial for-profit prisons incentivize mass incarceration, so responsible investors shun them
  • Alcohol or Pornography: Investors may also divest from companies involved in producing or distributing alcohol or pornography, which many deem harmful to society
  • Animal Testing: Companies engaged in animal testing for cosmetics or household products may be excluded by investors who prioritize humane treatment
  • GMOs: Biotech companies that produce genetically modified crops and seeds are shunned by some investors

Values-driven investors employ negative screens to avoid compromising their principles. These screens help them align their investments with ethical values.

Positive Screens

Positive screens help socially responsible investors look proactively for companies that drive solutions to global challenges. 

This can mean seeking out specific sectors like renewable energy or sustainable agriculture. It may also involve investing in communities through vehicles like impact funds and green bonds that fund environmental or social projects.

Impact Reporting

Socially conscious investors increasingly want to know if and how their portfolios drive change. This has led to a growing emphasis on impact reporting. Many funds now provide metrics showcasing the tangible social and environmental benefits generated by underlying investments.

Examples may include:

  • Tons of carbon emissions avoided
  • Millions of gallons of water conserved
  • Acres of sustainable farmland supported
  • Number of affordable housing units created
  • Jobs generated for the disadvantaged and marginalized

Detailed impact reporting allows investors to see how their money improves communities, the lives of fellow humans, and the planet.

Shareholder Advocacy

Responsible investors can positively influence corporate behavior through shareholder advocacy. By leveraging their power as part owners, these investors can submit proxy resolutions to improve environmental, social, and governance policies and practices.

Common objectives include increased transparency, climate action, board diversity, and fair labor principles. Investing in companies with room for improvement allows the opportunity to drive meaningful change through active ownership.

Socially Responsible Investment Support

Socially responsible investing provides an avenue to align ethical principles and money management, seeking competitive returns while staying true to one’s core values. 

Now that you have a sense of what socially responsible investing entails, let’s have an introductory conversation. We’ll discuss your priorities around values-based investing and develop a plan to build a portfolio that matches your financial objectives and commitment to social responsibility. Contact us today.