There’s a growing argument that, as investors, we have the power to do a lot of good with our money. With environmental and social issues being more prevalent than ever before, socially responsible investing, or SRI, has never been more popular. But what is socially responsible investing all about, really? And how do you know that you are investing in a socially responsible fund or company?
In this guide, I’ll take you through the basics of socially responsible investing in the UK and it’s various forms. Are you concerned about the world around you – but at the same time, want to make firm returns on your investments? It turns out, you can appeal to both. Let’s take a look at what SRI means in the modern age, and how you can work it to your advantage.
What is Socially Responsible Investing?
Socially responsible investing is all about investing in companies that are considered to be socially responsible based on the nature of the business. This means you are investing into a company that aims to have a positive social impact. These are businesses that are not wholly focused on profit at all costs.
For example, an SRI fund may include companies that actively give percentages of their profits to charities each year. Others may directly fund tree planting or may invest in marginalised communities. The list goes on and on – and in fact, there are many companies that change their social focus as needs evolve over time.
Crucially, socially responsible investing is a great way to ‘invest money with conscience’. Ultimately, you are still aiming to make money, but you are doing so through funds that have clear ethical focus.
There is an argument – and a misconception – that SRI isn’t profitable. While many people choose to invest this way purely to ‘give back’, there are many examples where investors are turning profits while still doing good.
Let’s dig a bit deeper into this phenomenon.
Can Socially Responsible Investing be Profitable?
The short answer is, of course, yes. However, like any form of investing, it really is down to the individual companies or funds you choose to invest in.
There is a long-running concern that SRI is purely about doing good, and not about making money. However, if you take a look at some of the biggest socially responsible investment platforms around, you’ll find that there are many SRIs that perform well over time.
However, there is the other side of the coin that suggests over time, some funds may tip more towards ethics and responsibility as opposed to really turning profits. Arguably, many SRI funds exist to give back first, and make money second. Your own priorities will, naturally, dictate what you look for, and how much money you put into a cause.
There is a strong argument for SRI being definitely profitable, but with a large if applied. A sustainable fund can be profitable, if the sector in which the companies are in continues to grow, and if the company involved continues to strike the right balance etc. That’s not always possible – as some experienced traders will tell you, there are big companies that go low on ethics and big on profit, some that do the exact opposite, and some that try to strike a balance between both.
It’s all about doing your homework and measuring performance. Thankfully, most of the big players in SRI fund platforms, including those of which I’ll discuss shortly below, give you plenty of tools to work out what’s going to appeal to your financial goals as well as your desire to ‘do the right thing’.
Naturally, there are cons as well as pros to this side of investing, and again, I’ll cover this in a bit more detail below.
SRI vs ESG vs Impact Investing: What’s the Difference?
It’s worth remembering that ‘ethical’ investing arrives in a few different shapes and forms. The main themes are ESG, Impact, and SRI – and before you put any money down, it’s a very good idea to familiarise yourself with the variations.
SRI
Socially responsible investing (SRI), as we’ve discussed, covers all as an umbrella term, but it’s actually also a very specific type of ethical investment. Specifically, an investor travelling this route will look for more than just positive impacts. They will also carefully consider any potential negative associations a fund or company may have.
SRI incorporates ESG elements (discussed below), which means that consideration is given to the financial viability of positive ethical associations. However, should a fund have negative connotations – such as companies that are affiliated with warfare, tobacco, gambling for example – these would not be considered as socially responsible.
SRI goes deeper than ESG in that it applies more of an ideological tint. It doesn’t just look at performance and potential value, but also the potential for clashing. Many choose SRI when they wish to go all-in on conscientious investing.
ESG
ESG, or Environmental/Social/Governance, is still ethically focused, however, it offers a large focus on financial potential.
Therefore, while investors working with ESG will still consider options that appeal to their consciences and which still aim to do good, this approach will consider the genuine performance value of their focuses.
For example, the ‘E’ in one ESG fund may be global warming. The ‘G’ might present a wide ideal of transparency and clarity. You may focus on a fund with an ‘S’ that strongly plants itself in human rights. All of these elements, while examples, could have varying impacts on financial performance.
This may seem a little counter-intuitive to some, but in many ways, it is arguably striking a good balance between ethics and profitability.
Impact
Finally, there are Impact investments. Impact goes completely in the other direction – investors focusing on this sphere will look for demonstrable, provable positive impacts. Investors working to this model want to see that their money is bringing genuine good to the world around them, be it wider society, the environment or otherwise.
Those choosing an Impact investing model will worry less about financial return and more about long-term impacts. Although of course the assumption is that these said long-term impacts will result in strong financial performance, as the world becomes more concerned with ethical and social responsibilities.
Pros & Cons of Socially Responsible Investing
It might seem as though there are no downsides to SRI. However, whether you are in it for profit or to give back to the community and/or planet, there are some ups and downs to consider. Here are a few brief points worth keeping clear in mind.
Pros
- You’re helping companies and brands that are trying to do good. This isn’t always a given in the modern age – profit is still king – and in some cases, they will need all the help they can get.
- It’s a great feeling knowing that your money is going somewhere worthwhile. Instead of purely lining someone’s pockets, you’re actively giving back – and if you have the money to do so, then why not?
- You’re doing your bit. We live in a world where money does go a long way with the right causes – and if you don’t have the time or the effort to actively support causes yourself, then the next best thing is to support from afar.
- You’re showing that you care. Some may paint some investors and traders with unfair labels that they are purely in it for profit. Yes, it’s great to make money on your investments, but that doesn’t mean you need to do so soullessly.
- You’re helping the SRI scene. Socially responsible and ethical investing is still a relatively new concept. While major investment platforms are leading with SRI as a selling point now, it wasn’t always that way. The more people who invest in these funds, the more powerful the sphere will grow in the years to come.
Cons
- Keep in mind that, occasionally, some companies and funds may change focus. This means you will need to keep on your toes to ensure a fund or brand keeps in line with your ethical needs and your ideology.
- You may find there are ethical funds that really don’t turn a profit. You may also find this worsens over time. If you have the capital to share, and you are preparing for this, more power to you – but keep an open mind.
- You need to do a lot of research if you want to make sure your investments are purely ethical. Yes – some companies claim they are doing good – but you cannot take them at their word. Do background reading, homework – and don’t believe everything you read on face value.
Best Socially Responsible Funds
The term ‘best’ here is highly subjective – and what’s more, what tops this list may vary from time to time. Such is the fluid nature of funds.
However, there are a handful of popular funds with a socially responsible focus. Here are just a few I feel are worth looking into.
Baillie Gifford Positive Change
The BGPC fund may not have been around for very long, but its various positive focuses have gone done well with ethical investors thus far. Their main focuses are in healthcare, inclusivity and poor community needs. In recent times, Bailie Gifford is a major backer of COVID-19 vaccine creators Moderna, which is now rolling out across the UK following extremely positive tests.
iShares Global Clean Energy
This ETF pick is a passive investment opportunity, which focuses on sustainable energy. Specifically, over a third of its portfolio revolves around wind power. This falls firmly in line with the big British push for wind energy. Even better for investors – it’s proven to not only be ethically sound, but firmly meeting the benchmark over the years.
Lyxor Green Bond
Green bonds are interesting, as they aim to give everyday investors direct access to green funding the world over. Money raised through these investments will go directly towards projects deemed ‘green’ by the fund manager. For example, the Lyxor Green Bond directly invests money in global warming research and environmental projects.
Of course, choosing the perfect SRI fund or ETF for your needs and goals isn’t a simple task if you are new to the world of investing. That’s why, in many cases, passive investment platforms might be more suitable for you.
Socially Responsible Investment Platforms
To round off, let’s consider a handful of investment platforms that offer socially responsible or ethical investment options.
Nutmeg, Chip, and Wealthify would all be my top picks for passive investing in socially responsible funds. All three offer you minimal buy-in to get started and have app interfaces as well as excellent desktop platforms. Most importantly all three have ready made SRI options.
Nutmeg
If I had to choose one I would go with Nutmeg. They are a hugely popular UK wealth management platform with an excellent interface and process which makes it easy to get started. Not to mention a great track record of profitability with their socially responsible portfolios. Even better if you can currently take advantage of 6 months worth of zero fees if you sign up via the link below.
Circa5000
Another passive investment platform which is focussed entirely on impact investing is Circa5000. This is a newer player, meaning they don’t have the firm reputations the aforementioned three have to support right now. That said, with minimal initial investment required and a largely passive approach, it’s worth a look. If you sign up via this link and invest at least £25 you will get an additional £5 free.
Hargreaves Lansdown
If you prefer to look at a more active approach on SRI, Hargreaves Lansdown provide an excellent platform which offers various ethical and SRI focussed funds. This means instead of leaving everything to robo-investors and portfolio managers, you can handle the individual fund and stock picks yourself. There are many different fund and stock options available through the HL platform.
Conclusion
So – is investing in SRI funds right for you? If you do have the capital to invest and want to make a difference, take a look through the top platforms I’ve listed above, and make sure to do plenty of research.
Yes – it is possible to profit from socially responsible investing, but you’ll need to strike the right balance.
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