If your finances are in solid shape such as where you have an emergency fund, sufficient income, and little to no high-interest debt, your next logical step may be to build wealth through investing. However, many people hesitate to invest because they don’t want to lose their hard-earned money or don’t want to support companies they don’t believe in with their dollars.
Unfortunately, you can’t completely eliminate your risk and may incur a financial loss. The good news is that through socially responsible investing (SRI), you can put your money toward organizations with missions you can get behind.
We’ll define and discuss SRI while offering a step-by-step guide to getting started. That way, you can see if this investment strategy fits your financial strategy.
Socially responsible investing involves financially backing companies you feel good about supporting. A socially responsible investor gives their money to firms that operate ethically, donate to important causes, care about the environment, and treat people respectfully. The ultimate goal of SRI is to positively impact the world (or at least avoid causing harm) while generating a profit for the investor.
While the concept of SRI is relatively new, it’s already incredibly popular and continues to gain traction. According to a 2022 United States Sustainable Investment Forum report, more than $8 trillion in assets under management followed sustainable investing practices at the end of 2021.
You can become a socially conscious investor by following these steps:
Before practicing SRI, you need to understand your values and priorities. Take a moment to look inward.
What causes pull at your heartstrings? How do you want to help your community, country, and world?
If you need some inspiration, reviewing the United Nations’ Sustainable Development Goals may be helpful. Some of the 17 goals include eradicating poverty and hunger, creating gender and racial equality, preserving the environment, and promoting peace and justice.
Once you’ve established your values, you can set some hard and fast rules for your potential investments. These criteria can help you quickly rule out unsuitable investments and put the others into future consideration.
For example, if one of your goals is to promote peace in the world, you likely don’t want to invest in a gun manufacturer. Similarly, if you’re concerned about gender equality, you probably don’t want to support a company that gets regularly sued over gender discrimination.
Next, it’s time to identify companies operating in relevant industries. For example, if you want to combat climate change by using alternative energy sources, you may want to research firms that produce solar panels.
You could also try to discover companies that allocate a portion of their profits for supporting causes you care about. If you dream of ending hunger, you may want to make a list of organizations that donate to food banks.
Finding individual firms to invest in may feel like finding a needle in a haystack. The process can be cumbersome and time consuming.
Investment vehicles like exchange traded funds (ETFs) or mutual funds can help you break into SRI much faster. These funds contain a collection of pre-packaged investments, instantly diversifying your portfolio by exposing you to a range of companies.
Some of these funds are specifically geared toward the socially conscious investor. While considering one wouldn’t eliminate the need for due diligence, it would give you a solid starting point for your research.
Once you have a short list of potential investments, it’s wise to do a deep dive into each one before moving any money around. Here are some of the things you can do during this process:
Read company mission statements and lists of values to see if they resonate with you
Review annual reports for the steps firms are taking to reduce environmental impacts, treat employees and customers well, and provide an overall benefit to society
Search the internet to check for lawsuits, scandals, or government sanctions
Use screening tools to determine how socially conscious each company is
There are many screening tools available. For example, As You Sow allows you to look up mutual funds, ETFs, and 401k retirement plans. Morningstar’s Sustainlytics enables you to see environmental, social, and governance (ESG) risk ratings for more than 13,000 individual companies.
Using your dollars to better humankind is noble, appreciated, and encouraged. However, you must remember your other investing goal: earn money to support your desired lifestyle and leave a legacy.
With that in mind, you must also consider an investment’s financial performance during your screening process. Fortunately, investing for profit and for societal good are not mutually exclusive.
As an investor, you have a say in how the company operates. Keep up to date on what the company is doing by attending annual meetings and voice your opinions by voting on shareholder resolutions. Don’t be afraid to contact firm leadership if you have an idea to help the organization become more socially conscious.
Investing isn’t a one-time activity. Instead, it’s a process that requires your ongoing attention. Commit to reviewing your portfolio at least annually.
If your investments still align with your values, stay the course. Otherwise, repeat the steps above to identify and select new companies or funds to back.
Investors shouldn’t have to choose between making a profit and abiding by their consciences. Now, you can use your money to support organizations doing good work while building wealth.
This article is provided for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
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