How to Invest Ethically

 In Blog

As the moral and ethical standards of today’s investors grow more pronounced, the Environmental, Social, and Governance (ESG) aims to screen the overall ethical standing of any given company. This new demand from the market is giving rise to a new category of investors who make the ethical responsibility of a company a priority. About 30% of investors currently own responsible investments and of those who do not, nearly half plan to start soon, according to a recent survey conducted by TIAA. In this article, we’ll outline the intricate world of Socially Responsible Investments (SRI) and show you how to incorporate it into your portfolio in a way that is both personally rewarding, and profitable.

What is an SRI?

SRI’s are investments that are deemed to be socially responsible based on their involvement in issues such as environmental sustainability, human rights, conservation, or alternative energy. This category excludes industries that sell or profit from addictive or harmful products such as alcohol, tobacco, or gambling. One way that companies are categorized and ranked, is by their Environmental, Social, and Governance Funds (ESG) measures.

Environmental, Social, and Governance Funds (ESG)

Investors can use this measurement to consider a company’s environmental, social, and governance responsibility beyond traditional technical analysis. Regardless of the score, the main objective of an ESG is still the financial achievement of any given company.

Mutual Funds and ETF’s

The lion’s share of mutual funds doesn’t discriminate between holdings on ethical grounds. Their chief priority is their bottom line. However, there are a few mutual funds and ETF’s out there who do prioritize the overall responsibility of their collection of holdings. Here are a few examples of SRI’s with a proven track record.

TIAA-CREF Social Choice Bond Fund

This fund invests in a wide variety of securities that demonstrate ESG leadership and/or direct and measurable environmental and social impact. 70% of the fund’s assets are divided between securities that have the highest ESG scores. The remaining 30% is set aside for impact investing. This is mostly used to buy bonds in promising projects that show the ability to create a positive and lasting impact. For example, they hold a bond that helped an organization provide vaccinations for 44 million children.

Parnassus Endeavor and Parnassus Mid-Cap

Parnassus managers combine ESG scores, with their own analysis to curate a group of investments that hold to the highest ethical standards. Their founder firmly believed that companies that are socially and environmentally responsible will outperform the market. Turns out they were right, Endeavor has returned an average of 14.0% per year over the past five years, compared with 12.6% annualized for the S&P 500 (Kiplinger).

It’s clear that social and environmental responsibility is something investors would like to see in their portfolios. As the market slowly realizes this sentiment among the general public, time will tell whether they will provide a more robust collection of ethical options.

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