Looking for a Way to Invest According to Your Values?

Dear Carrie,

I'm fairly new to investing and want to choose companies that support causes I care about—like the environment. Is this a good idea?

—A Reader

Dear Reader,

As Kermit the Frog says, it's not easy being green. But for today's investors, it's easier than ever to invest green. That's because increased awareness and socially focused investments are giving investors the opportunity to support causes that are important to them through their portfolios. And it's not just the environment. Investors today can choose a wide variety of social issues to support—from clean technology to racial equity to gender diversity and more. And it's an idea that's gaining traction.

Investing according to your values is broadly called socially responsible investing (SRI). You'll also hear it referred to as environmental social governance (ESG), social choice, socially conscious investing, impact investing, and sustainable investing. For this column, I'm going to call it SRI.

But what it's called is less important than the fact that investors of all ages and economic levels, whether experienced or just starting out, can use SRI as a strategy to invest their money while making a positive difference. Here are some things to think about as you decide if this is the right approach for you.

SRI goes beyond risk and return

Traditionally, risk and return are key factors in choosing investments. And that still holds true for SRI. It's just that with SRI, the idea is to choose investments based on whether or not they align with your beliefs and values, in addition to considering risk and return.

So, you're still sticking with the fundamentals of investing such as looking at your time horizon, how you feel about risk, asset allocation and diversification and your long-term financial goals. You're just adding in another factor when considering which investments are right for you.

You can be inclusive as well as exclusive

In the past, the primary motivation of socially aware investors was often to avoid investing in companies that conflicted with their values. For instance, they might actively choose not to invest in areas like tobacco, gambling, firearms or alcohol. And that's certainly one way to go.

But now, many investors are also looking at what they can include in their portfolios. For example, they might want to target companies that fight climate change, preserve natural resources, provide opportunities for under-represented populations, or have strong employment and community practices. And the good news is that now it's easier than ever to find such companies and support causes you care about with your investment dollars.

Mutual funds and ETFs are a good way to get started

While you could choose to invest in individual companies that support your specific causes, mutual funds and ETFs offer a low-cost and convenient way to create a diversified SRI portfolio. Today there are a variety of mutual funds and ETFs that align with specific interests, such as low carbon, gender diversity, good governance and more.

There are also "thematic" funds that tend to focus on companies from a single industry that support a specific issue, so you can invest even more narrowly. Concerned with renewable energy? Chances are you can find a fund that invests in wind and solar companies. Want to support social equality? You might look for a fund that invests in minority-owned businesses.

Performance and fees still play a part

Doing good for others doesn't mean you shouldn't also look out for yourself. Bottom line, you still want to grow your portfolio. So you should approach SRI investments the same way you do any other type—with an eye on performance potential, costs and risk.

One concern for SRI investors is whether they have to give up performance to achieve their social goals. So far, that's not the case. While SRI funds don't have a long history, current research has shown they've generally performed as well as non-SRI funds that don’t use any social screening and just focus on risk and return. Furthermore, costs are comparable. There are plenty of online research tools that let you compare expense ratios, performance benchmarks and risk measurements. As always, read a fund's prospectus before investing.

It doesn't have to be all or nothing

There are many levels of socially responsible investing. As you build your portfolio, it's up to you whether you want all your investments to be SRI or just a portion.

You might start by exploring SRI with one or two mutual funds or ETFs. As your assets grow or if you want to invest even more exclusively in the causes you support, you could work with a financial advisor who can help you target individual companies that reflect your beliefs. Or you could select an SRI portfolio of individual securities managed on your behalf by a professional asset management firm. Whatever your SRI goals or asset level, you have choices.

For a lot of people, myself included, investing isn't an end in itself but a means to an end. If that end for you is to make a positive difference in the world at the same time that you invest for your future, today's SRI options give you a real chance to achieve it.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.