Value Investing 101

Investing & Retiring, Mutual Funds

Most people today feel strongly about at least one social cause. These causes range from the environment, pollution and sustainability to drug and alcohol addiction, human rights and individuals’ religious beliefs.

Those who are especially passionate about these and other causes now have an opportunity to put their investment money where their mouth is by investing in socially responsible ways. The field of socially responsible investing (or SRI) is devoted to enabling individuals and institutions to invest their money in ways that are in alignment with their core values and beliefs as they relate to particular causes.

Making a Positive Social Impact

Also sometimes referred to as socially conscious investing, mission investing and ethical investing, socially responsible investing practices consider environmental, social and corporate governance (or ESG) criteria in order to make a positive social impact with their money while striving to earn competitive returns at the same time.

The popularity of SRI has exploded in recent years, as more individuals and institutions seek to make a social difference in our world with their investments. According to the Report on Sustainable and Responsible Investing Trends in the United States, at least $3.74 trillion was invested in the U.S. using SRI strategies and principles in 2012 (the most recent year for which statistics are available). This accounts for about one out of every nine dollars that are under professional management today.

In addition, there are well over 300 SRI mutual funds in the U.S. that consider ESG criteria when making investments, with total assets of about $641 billion. This is up from just 55 SRI mutual funds with about $12 billion in assets in 1995.

There are three main SRI strategies:

1. Choosing to invest in companies that promote certain actions that are in line with your core values and beliefs as they relate to particular causes. Companies involved in alternative and sustainable energy production are a good example of this. Or conversely, choosing not to invest in companies that promote actions that are in conflict with these values and beliefs. For many, an example of such would be companies that manufacture or distribute tobacco and alcohol.

2. Practicing shareholder engagement and advocacy in order to proactively influence corporate decisions that could affect a particular cause. Strategies may include initiating constructive dialog with corporate decision-makers, filing shareholder resolutions, and attracting media attention to causes and issues that corporations may be able to influence.

3. Community investing, i.e. investing in ways that will direct capital to communities (both here and abroad) that are underserved by traditional banks and other lending institutions. This may include providing low-interest loans to small business owners in order to spur economic activity in under-developed regions of the U.S. or all around the world.

The Hottest SRI Areas

The Forum for Sustainable and Responsible Investment (US SIF) has identified the following as the fastest growing areas of SRI:

• Alternative investment funds — These include social venture capital, private equity, hedge funds and property funds. There were 301 SRI alternative investment funds in 2012, with about $132 billion in capital under management, up by 249 percent from just 177 funds with $38 billion in capital two years earlier.

• Mutual funds — There were 333 SRI mutual funds in 2012 that held a total of $641 billion in capital under management. This grew at a rate of 103 percent over two years from 250 SRI mutual funds with just $316 billion of capital.

• Community investing institutions — These include community development banks, credit unions and loan funds. A total of 88 banks had gained certification as Community Development Financial Institutions (CDFIs) in 2012, an increase of sixteen additional banks over two years. Community investing institutions held a total of $61 billion in 2012, up from $42 billion two years earlier at a growth rate of 47 percent.

How to Become a Socially Responsible Investor

For most individual investors, the best way to participate in socially responsible investing is to choose mutual funds that consider ESG criteria when making investments. The funds could screen out companies that have any involvement in sectors that some investors might find objectionable —such as tobacco or alcohol. Alternatively, they might seek out companies that are actively involved in a sector that supports a particular cause or set of values, such as alternative energy production or other environmentally-friendly initiatives.

The US SIF has created a list of 159 different SRI mutual funds to get socially responsible investors started. The list includes each fund’s ticker symbol, fund type, inception month, size (in assets under management), performance history, management fees and expense ratios, as well as offering guidance on each fund’s ESG criteria.

Socially responsible investing gives you the opportunity to support any social causes that you feel strongly about, while building up your investment portfolio. This is one way to “do good” and still seek to earn high rates of returns on your investments.

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