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Socially Responsible Investing

Introduction

Understanding how your personal investments impact the world has never been easy, but with some large companies starting to make questionable decisions, it may be hard to understand what you can do with your money to make a difference. 

Thankfully, there has been enough demand from newer investors that many large firms, such as Schwab, Vanguard, and Fidelity have all started exploring socially responsible funds more aggressively than before. 

Start Here

If you want to invest socially, be sure to first familiarize yourself with the MSCI ESG Indexes. ESG stands for Environmental, Social, and Governance, and the indexes, similar to the S&P 500, track the largest companies in that particular space. Most socially responsible funds are based on some slight variation of these indexes. 

ESG funds will generally invest according to standards in one or more of these 5 areas:

  • Alternative Energy
  • Energy Efficiency
  • Sustainable Water
  • Green Building
  • Pollution Prevention

Even more interesting are the social funds, where you see a variety of themes (below), such as the Ex-Controversial Weapons Fund and the Catholic Value Fund. For example, the Catholic Value Fund excludes companies that are involved with alcohol, gambling, and tobacco, so don’t expect to see Anheuser Busch or Marlboro in your list of holdings. 


As of right now, the best way to get involved socially with your investments is to choose the causes you are most passionate about, and find a fund that matches your goals. Beware that most funds cater to only one category of social investing, and do not guarantee that their priorities are "socially responsible" across the board. 

What About Returns?

The factor holding many investors back is the lack of a proven track record of returns in these funds. For example, three of Fidelity’s four ESG funds are less than two years old. While returns have generally been favorable since their inception, the risk is still high. ESG funds are inevitably linked to politics and environmental regulation, which opens the door to volatility depending on the countries you may be invested in.  

Are ESG Funds For You?

Socially responsible investing still has room to grow, but the demand is strong enough that you should not expect this style of investing to disappear any time soon. For those interested in taking on more risk for a potential greater reward, both financially and emotionally, ESG funds may be for you. However, if the global political climate and high volatility scares you, it may be best to let these funds be until we have a more proven track record of success.