Responsible investment is a growing trend in the United States, especially among Millennial and women investors. According to a 2020 report from the Forum for Sustainable and Responsible investing, one out of every three dollars under professional management was dedicated to sustainable investing strategies by the end of 2019. That comes out to $17.1 trillion in investments, a 42% increase over the prior two years. 

In this article, we’ll cover:

• Why investors choose SRI investing
• ESG factors
• Pros and cons of SRI investing
• Adding socially responsible investments to your portfolio

Why investors choose SRI investing

Everyone weighs different factors based on their personal circumstances when making investment decisions, and for many people, one consideration is being socially responsible. Investing, after all, affects more than an individual’s bottom line; when you put your money into certain companies or sectors, you’re financially supporting their success. 

Motivations for choosing an SRI strategy vary widely based on a person’s values, such as religious beliefs, cultural ideals, and personal convictions. For example, an investor who’s committed to fighting climate change may avoid investing in the oil and gas industry in favor of investing in ETFs or stocks that support green energy. An animal-loving investor may put their money into the stocks of consumer goods companies that support cruelty-free products and avoid those that test products on animals. 

The personal values that guide socially responsible investing decisions are as varied as people themselves, which often leads to different interpretations of the definition of sustainable investing. For that reason, investment professionals tend to consider SRI strategy based on Environmental, Social, and Governance (ESG) criteria.

ESG criteria: what qualifies as a socially responsible investment?

Environmental, Social, and Governance (ESG) investing uses specific, measurable criteria to identify a socially responsible or sustainable investment. It’s closely related to SRI, and the two approaches often complement each other. The main difference is that SRI strategy is focused on excluding certain kinds of investments from your portfolio, while ESG investing is about including investments that meet the three categories of ESG criteria.

Environmental

Environmental investing focuses on the conservation of the natural world. Companies that have a negative impact on the environment due to an outsized carbon footprint or a reputation for careless handling of toxic chemicals are unlikely to qualify for this category. Companies that are directly working for environmental improvement in the following areas are generally categorized as ESG investments:

• Climate change
• Water pollution
• Air pollution
• Deforestation
• Greenhouse gas emissions

Social

A company’s social impact takes into consideration how its practices affect both individuals, including employees, and the wider community. For example, if an organization is dedicated to improving labor practices nationwide but fails to provide suitable working conditions for its own employees, it’s unlikely to qualify as an ESG investment. The criteria on which a company’s social impact is measured include:

• Gender and racial inclusion
• Human rights
• Labor practices
• Customer responsibility
• Community impact

Governance

Governance in ESG investing takes into account the standards for running an ethical company. Organizations that operate with transparency, integrity, and accountability while focusing on diversity in leadership are likely to qualify in this category. Factors to consider include:

• Shareholder rights
• Political contributions
• Hiring practices
• Tax transparency

How do SRI portfolios perform?

Trends show that returns from sustainable investing are growing year over year. A study from the Morgan Stanley Institute for Sustainable Investing found that there is “no financial trade-off in the returns of sustainable funds compared to traditional funds, and they demonstrate lower downside risk.”

Portfolios that rely on an SRI strategy may perform well, especially over the long term, as companies with strong ESG profiles produce more effective and profitable solutions to social problems like climate change and human rights. It’s possible to maintain a diversified and socially responsible portfolio as a growing range of companies and market sectors are focusing on the factors that drive SRI and ESG investing. Many brokerages offer SRI and ESG funds to choose from.

Pros and cons of socially responsible investing

As with every investment strategy, there are pros and cons to socially responsible investing. An SRI strategy can be a practical way to take a stand for your values, and knowing whether a company maintains ethical practices can alert you to potential risks about the organization’s long-term performance. Research has shown that investing in SRI funds can produce returns comparable to traditional funds, potentially with lower market risk.

On the other hand, you may also be missing out on some potentially lucrative conventional investment opportunities if you focus solely on an SRI strategy. The definition of sustainable investing is also subjective; just because an ETF or mutual fund is positioned as ethical doesn’t mean every security it holds aligns with your values, and some companies may attempt to greenwash their practices. 

Building a socially responsible portfolio

Socially responsible investing can be a path to pursuing your goals for the future, both your own financial aims and the change you want to see in the world, so be sure to consider the factors important for both. When you’re putting together your SRI strategy, take into account your risk tolerance and time horizon, just like you would when building any kind of investment portfolio. You’ll also want to research companies and funds based on the ESG categories that matter to you. Do your homework, open an investment account, and investigate the options for putting your money to work for your values.

1. Choose the ESG categories that matter to you

ESG investing is personal, so look at the categories that line up with the issues that you care about. From battling pollution to protecting workers’ rights to ensuring fair hiring practices, your ethics and priorities can lead you in looking for the companies and funds that reflect a responsible investment in your eyes.

2. Open an investing account

If this is your first foray into the world of investing, you’ll need to open an investment account with a brokerage firm. Do some research to find a brokerage that offers investment options that fit your needs. You can invest in the stock of individual companies or funds geared toward socially responsible investing; each brokerage will have different offerings. You may also want to consider factors that affect your needs as an investor, like lower fees, mobile app access, and investor support. 

3. Research stocks and funds thoroughly

Once again, do your research. Explore ETFs and stocks that might align with your responsible investment priorities. Thoroughly investigate any companies you’re considering to ensure they truly walk the walk of the values they espouse. Tools like the S&P Global’s ESG Evaluation can help you find out if a security aligns with your SRI strategy.  

Sustainable and responsible for the long term

Socially responsible investing and ESG investing offer the opportunity to champion the causes that matter to you while supporting your long-term financial goals. For many people, that’s a win-win: investing in a brighter future for oneself and the wider world at the same time. 

Stash can help you build a diversified, sustainable portfolio with ETFs focused on environmentally and socially responsible missions and causes. With any dollar amount, you can start investing today, the socially responsible way.

The post What is Socially Responsible Investing (SRI)? appeared first on Stash Learn.

As we celebrate our planet, you can invest to show you care. You may want to think about where your money goes, and how that affects the environment, especially as climate change becomes a more pressing issue. Companies are facing increasing pressure from governments and consumers to put the wellbeing of the planet at the forefront of their business. 

How the government is combating climate change

Most recently, the Securities and Exchanges Commission (SEC) began considering new climate directives for businesses. In March 2022, the SEC proposed new rules that would require public companies to disclose their greenhouse gas emissions and the climate risks to their work. Under the proposal, companies would be required to outline their climate risks, the costs associated with moving away from fossil fuel usage, and the costs to their businesses caused by climate change. Companies also would have to disclose the direct and indirect greenhouse gas emissions that their work creates.

Combating climate change has similarly been central to the Biden administration. In November 2021, the U.S. Environmental Protection Agency (EPA) announced plans to reduce methane production, which is the second-biggest contributor to climate change, behind carbon dioxide. By 2030, President Biden is also hoping to reduce greenhouse gas emissions that cause climate change by 50%. But a divided Congress has expressed some opposition to Biden’s plan.  

What companies are doing to address climate change

On a company level, businesses are taking climate change more seriously than ever before. Social media platform Pinterest, for example, announced in April 2022 that it was releasing new guidelines that would remove ads or content that contains misinformation about climate change. Pinterest’s decision followed 2021 commitments from Google and Facebook to crack down on misinformation.

Many companies, such as Levi’s, Costco, BlackRock, Netflix, and others have made promises to cut their carbon emissions. And while some, like Google and Microsoft, have made strides in their emission reductions by pivoting to renewable energy sources like wind and solar, many are reportedly still finding themselves limited in how much they can currently cut emissions. Some companies, like investment firm BlackRock, have been less transparent about how they’re living up to climate pledges. BlackRock, for example, has called on the companies it invests in to remove as much carbon emissions as they add by 2050. Yet BlackRock reportedly  hasn’t disclosed whether those companies are planning to hit that goal.

How climate change affects the economy

Scientists have urged immediate action when it comes to climate change. A failure to reverse the effects of climate change could have devastating consequences for the economy, and for humanity, according to those scientists. The Intergovernmental Panel on Climate Change (IPCC) determined in its 2022 report that in order to limit global warming to 1.5°C, global greenhouse gas emissions must peak before 2025, and cut by 43% by 2030. Globally, methane emissions would also need to fall by about a third. While the report found that emissions remain high, their rate of growth has slowed, potentially showing increasing policies aimed at climate change. 

The U.S. federal government has warned that with the current pace of global warming, the ability to conduct business may be jeopardized. Every four years, the National Oceanic and Atmospheric Administration, a division of the U.S. Department of Commerce, produces something called the National Climate Assessment study.

Among other things, here’s what the most recent report found in 2018. (The next report is due out in 2023):

• By 2050, the average annual temperature of the U.S. could increase by 2.3 degrees.
• The U.S. economy could shrink as much as 10% by the end of the century, losing hundreds of billions of dollars in national and overseas trade, not to mention health costs and disaster relief. Farming and other agriculture will be harmed, through the declining health of livestock, reduced crop yields, and threats to food security, among other things.
• Aging national infrastructure could be further harmed by extreme weather such as flooding, heat waves, and wildfires, leading to threats to the economy, national security, and human health.

“Without substantial and sustained global mitigation and regional adaptation efforts, climate change is expected to cause growing losses to American infrastructure and property and impede the rate of economic growth over this century,” the report says.

There are ways to invest in sustainable businesses hoping to have a positive impact on the planet, however.

Investing for the planet

Sustainability—or creating products in a way that doesn’t harm the planet or people—is also a growing business niche. Numerous funds rate businesses on something called environmental, social, and governance (ESG) and socially responsible investing (SRI). The Sustainability Accounting Standards Board (SASB) provides standards by which ESG investments can be measured. As of July, 2020, the global value of sustainable investments totaled more than $40 trillion.

An investment’s ESG or SRI rating might take into account how companies treat their employees, how ethically they treat people in their supply chains, and the environmental impact of the company. So an ESG or SRI fund could include tech companies striving to reduce their carbon footprints by using alternative energy sources, companies in other sectors working to provide clean water to people who don’t have it, and more. 

In contrast, an ESG or SRI fund might exclude companies that produce fossil fuels that contribute to global warming, or ones whose supply chains may include laborers who work in substandard conditions.

Corporations could increasingly feel pressure to reduce their environmental impact as countries develop plans for “green economies.” A green economy is one that prioritizes reducing carbon emissions to combat climate change, while also creating growth and job opportunities. In the U.S., approximately 9.5 million people are employed by the green economy, which generates $1.3 trillion in revenue each year, according to a 2019 report. 

You can find out more about ESG investing here.

Get Stash

As you celebrate Earth Day, remember that you can invest in stocks and exchange-traded funds (ETFs) that include companies that are fighting climate change by reducing their carbon footprints or providing clean energy.  You can find the environmentally-minded ETFs that Stash offers under “MIssions and Causes.“ Remember all investing involves risk, and you can lose money in the market. Stash urges investors to follow the Stash Way, which encourages diversification, regular investing, and investing for the long term.

The post Earth Day 2022: How to Celebrate the Planet this Year appeared first on Stash Learn.

Do you want your investments to support companies with an eye on the greater good as well as their bottom lines? You might want to consider them in your investment portfolio.

Buzzwords: ESG, SRI, and screens

Investing strategies and investments that consider factors like sustainability, workplace equality, and political impact are often called ESG (environmental, social, and governance) or SRI (sustainable, responsible, and impact).

Both of these categories focus on similar factors. The main distinction is that ESG investing is often based on inclusionary screens, while SRI investing is based on exclusionary screens.

Survey: 71% of all investors surveyed were interested in some form of sustainable investing

Screens are how an investment is included or excluded from a portfolio or fund. If a company is creating an index, they can chose to include and exclude certain investments based on a number of factors.

If an investment or index wants to focus on sustainability? That’s an inclusionary screen. If it wants to avoid companies that have a bad track record with workplace equality? That’s an exclusionary screen.

Some factors that are considered in order for something to qualify as an ESG investment:

Environmental: Resource utilization, sustainability office, environmental impact
Social: Corporate philanthropy, working conditions, progressive and inclusive HR policies
Governance: Reporting and disclosure, product recalls, balance of powers

Who is ESG investing for?

In 2015, Forbes partnered with the news site Elite Daily to conduct a Millennial Consumer Study. The data revealed that 75% of Millennials think that “it’s either fairly or very important that a company gives back to society instead of just making a profit.”

A 2015 TIAA Survey found that 90% of Millennials agreed that “I’d like my investments to deliver competitive returns while promoting positive social and environmental outcomes.”

The survey also indicated that 76% of Millennials care more about having a positive impact on society than doing well financially. (Only 42% of non-Millennials felt similarly.)

A recent Morgan Stanley survey found that 84% of millennial investors are interested in sustainable investing. It also stated that, “female investors are more likely to factor sustainability into their investment decisions and are more likely to see the advantages of doing so.”

But it’s not only Millennials that seem to prioritize these factors.

While the aforementioned survey made it clear that almost all Millennials are down with ESG, it also found that 71% of all investors surveyed were interested in some form of sustainable investing.

Interestingly, Europe is leading the charge when it comes to ESG investing. In 2014, “58.8% of European invested assets already are invested in a sustainable way, compared to 31.3% in Canada and 17.9% in the United States*.”

Do I have to sacrifice returns?

While every fund is different and has risks that must be weighed on a case-by-case basis, many leaders in the investment field are optimistic about ESG investing.

“Over time, high ESG scores tend to result in positive effects on investment performance,” Sharon French, head of Beta Solutions of OppenheimerFunds, wrote on the company’s blog last month  “It’s not only about changing the world, it’s about understanding how the world is changing.”

Morningstar, a provider of independent investment research, dedicated their entire December/January issue to sustainable investing: “Sustainable Investing Takes Off.”

“I believe that investing itself is a socially conscious act. It means deferring gratification today for greater security and opportunity for yourself and your loved ones tomorrow,” says Don Phillips, managing director for Morningstar.

ESG investing on Stash

Excited about investments that focus on sustainability and social responsibility? There are options available to you on Stash. Explore more here. 

The post Do You Know About ESG Investments? Investing as Social Activism appeared first on Stash Learn.