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What Is Socially Responsible Investing?

by Cato Conroy 3 years ago in investing

Socially responsible investing is a major trend, but what does it actually mean?

The more you look at the news, the harder it is to have faith that corporations will do the right thing. It's not even because of old industry standards involving environmental damage like the things that happened in Bhopal or Love Canal either. New evidence of corporate corruption crops up all the time.

Nationwide, WalMart has been taking advantage of low worker wages, all while asking for government subsidies. In Wisconsin, FOXCONN took millions of dollars for a plant that was never actually constructed. The FCC's regulations were tainted by T-Mobile, Verizon, and AT&T.

With all the bad news you hear about on TV about large corporations, it's hard to believe that any company is socially aware of their impact. Thankfully, there are good companies out there—and that's why they are now being targeted for investments by millennials.

Does this sound like something you'd want to learn more about? Are you looking for reasons why you should invest in the stock market in your 20s? If so, you might want to jump on the socially responsible investing bandwagon.

What is socially responsible investing?

Once upon a time, not too long ago, it was assumed that all companies had similar ethics. It was a time when people were primarily interested in seeing which companies made the most money. Obviously, this is starting to change now that people are starting to hold corporations accountable for their actions.

People are growing tired of seeing companies that turn a profit at the cost of the environment or human rights. This brought on a new trend of choosing to invest in companies that show a high degree of ethics.

It’s called “socially responsible,” or at times, “ethics-based” investing. By offering money to companies that behave ethically, investors can make an impact on corporate policy while still seeking high returns.

This movement came about after people started to acknowledge how investments change a company’s choices.

The goal of a corporation is to make money, period. They can’t make make money without having people back their investments or buy their products. If companies realize that they can get more investors by behaving ethically, they will be more inclined to work with them.

In layman's terms, this kind of investing offers a similar impact to boycotting. By refusing to invest in companies known for unethical practices, investors are showing that they don’t support bad business—and that they will side with their competitors.

The flip side of this is that businesses that show serious moral turpitude are given bonuses in the form of investments.

Socially responsible investing can mean a lot of different things, but it all boils down to one concept.

The overall idea behind ethics-based investing is to make your money speak for your principles. It’s a way to support companies that act on your ideals while also letting your money work for you. That being said, being an ethical investor can mean a lot of things to a lot of different people.

Some people will only invest in companies that are environmentally-friendly. Others will not donate to companies that donate to charities they don’t believe in. Still more will only choose companies that are known for treating their employees well.

Becoming an ethics-based investor is actually really simple.

As an ethical investor, you have to realize that your money equals serious power. The way to become an ethical investor is actually pretty easy: You just need to invest in companies that promote actions you want to see happen in the world.

This can mean doing things like:

  • Investing in ETFs that promote green energy rather than fossil fuels
  • Investing in companies that make meat alternatives
  • Investing in companies that treat employees well and pay them living wages

You can use any real investing strategy you want for this, and plenty of S&P 500 companies fit the description of ethically-conscious groups. That said, you don't have to invest in big companies all the time. What matters is that the companies you back are doing the right thing.

Morality is a relative thing in this world. What may appear ethical for some won’t be ethical for others. That’s why there’s no official stance on what companies you “have to” invest in if you want to be socially responsible.

If you’re not sure where to turn your money towards, consider companies that do the following:

  • Practice fair trade.
  • Treat the environment well.
  • Don’t oppose unions.
  • Donate money to charities you love.
  • Have ethical beliefs.

Additionally, socially responsible investing also urges people to avoid investing in companies that go against their morals.

It’s really hard to say your investments are ethics-based when only half of your portfolio really stands for what you believe in. That’s why a lot of people who trade using ethics as a main principle suggest selling off shares of companies that haven’t been working in the best interest of people.

This is why you won’t see ethical investors go to the stock market looking for WalMart or choosing companies that are known for pushing bad policy. It’s just the way that they work.

Due diligence, therefore, means that you don’t just look at the numbers a company offers.

When you decide to start doing socially responsible investing, numbers only matter so much. This is an investment strategy that urges you not to “sell your soul” by investing in highly profitable companies since what they take away is often priceless.

To do proper due diligence in this field, you will need to look at the stances that a company makes. Do they donate? Do they openly support your causes? These things matter if you want to make a difference.

Motif is one of many investing apps that helps make investing easier. They actually went out of their way to find companies that work on green endeavors like clean energy—and then bundled them up into an ETF that focuses on it. So if you're not already aware of all the reasons why investing in ETFs is the smartest way to start investing in the stock market, you can learn to make money ethically going this route.

This is just one of a handful of specialty apps that are designed with socially responsible investing in mind. Advisors did the due diligence of finding decent companies for you, which means you really don’t have to put in too much time to make a positive impact with your cash.

One micro-investing app went so far as to be entirely focused on responsible investing.

Swell, for example, is one of the newer apps to get in on responsible investing—and it’s actually pretty great. You only need $50 to start investing using the app, and it will find investments that work with the goals you want to see the world accomplish. It's one of the best apps for micro-investing around, simply because it's globally conscious.

Overall, socially responsible investing is a good idea for everyone.

Considering that there are apps that make ethical investing easy for everyone, there’s really no excuse to invest in companies who clearly don’t care about making the world a better place. If you want your investments to pay off in priceless dividends, give this trend a try. Your wallet and the world will thank you.

investing

Cato Conroy

Cato Conroy is a Manhattan-based writer who yearns for a better world. He loves to write about politics, news reports, and interesting innovations that will impact the way we live.

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