Socially Responsible Investing

Looking to build a portfolio that reflects your personal beliefs and values? If so, you're not alone. More investors are choosing to go beyond risk and return in selecting investments that support—or avoid—specific companies, industries, or market sectors.

This type of investing can put your money to work—while making a positive difference in areas like the environment, health, and human rights. So, is socially responsible investing right for you? Here are some things to consider.

What is socially responsible investing (SRI)?

Socially Responsible Investing means selecting investments based on whether or not they align with your beliefs and values, in addition to considering risk and return. It is often associated with avoiding certain companies, industries, or business activities that don't align with an investor's values.

SRI is one approach within the broader ESG and values-based investing landscape. ESG investing generally refers to approaches that consider environmental, social, or governance factors in addition to traditional measures of risk and return. Other related approaches may include:

• Socially conscious investing
   
• Impact-oriented investing
   
• Sustainable investing
   
• Thematic investing

These terms are sometimes used interchangeably, but they don't always mean the same thing. ESG, SRI, sustainable, impact, and values-based labels are not standardized across the industry, so it's important to understand how a fund or strategy defines and applies its approach.

How does SRI work? 

SRI strategies were originally used to generally avoid industries like arms, tobacco, gambling, or alcohol. But today's investors are also using SRI to specifically target investments that support the things they care about, such as:

• Climate change, clean air and water, and responsible forestry and agriculture
   
• Disadvantaged and under-represented populations
   
• Strong employment, community, and shareholder practices
   
• Transparent operations and accounting

How do I do build an SRI portfolio?

You can choose to build an SRI portfolio by choosing SRI funds and ETFs, or by picking stocks and bonds based on your specific preferences.

Some investors choose to add a few or several SRI investments into their existing portfolio. Other investors want their entire portfolio aligned with their SRI preferences. The right approach depends on your goals, risk tolerance, time horizon, and how much flexibility you want in your investment choices.

Add SRI funds and investments to your current portfolio.

• Off-the-shelf mutual funds, exchange-traded funds (ETFs), and managed accounts can offer convenient, low-cost investments that broadly align with your preferences, like low carbon, good governance, and gender diversity. Keep in mind there is not a universal definition or list of requirements for funds to use the SRI label.
   
• Thematic funds focus on companies from a single industry involving issues such as air quality, alternative energy, and clean water.
   
• Impact-oriented funds generally seek exposure to companies, projects, or issuers associated with specific environmental or social outcomes. Investors should review how the strategy defines impact, how outcomes are measured, and whether the approach is primarily thematic, values-aligned, or explicitly impact-focused.

Build your own all-SRI portfolio.

• Build a complete SRI portfolio security by security. This approach may give you more control over what you own and avoid, but it also requires more research, monitoring, and portfolio management.
   
• Screen and compare investments, and choose mutual funds, ETFs, or separately managed accounts that fit your investment goals and your values.
   
• Check out an ETF's or mutual fund's prospectus and annual report, which describe details about the fund including the investment objective, investment screening criteria and the management team. To check the investment characteristics of a mutual fund or ETF, you can also check out the fund's web page and look at details including net expense ratio, performance relative to peers and benchmarks, risk measures (such as standard deviation and beta), and assets under management.

Work with an advisor to build a custom portfolio.

• Finding SRI investments that align perfectly with your values and goals can be challenging.
   
• Depending on your needs and asset levels, working with an advisor to build a custom portfolio may better suit your situation and goals.

What should I consider before I invest?

As an SRI investor using mutual funds and ETFs, you'll want to make sure the fund and all investments within the fund are managed and selected in a way that aligns with your values. You should also evaluate the investment the same way you would evaluate any other fund, including:

• Costs
   
• Performance potential
   
• Risk management
   
• Investment team quality

It's also important to understand what you may be giving up. Excluding certain companies or industries can affect diversification and may cause performance to differ from a broader market benchmark. Some SRI or ESG-related strategies may also have sector or factor tilts that can help or hurt performance depending on the market environment.

Are there any trade-offs with SRI ETFs and mutual funds?

When it comes to costs and investment returns, there may be little to no trade-offs. Depending on the time period and sector, many SRI funds have performed about as well as non-SRI funds, but results vary by strategy, market environment, sector exposure, fees, and the specific approach used. The costs of similar SRI and non-SRI strategies may be about the same.

Invest to support your goals and your values.

Whether you invest on your own or with the help of an advisor, socially responsible investing lets you build a portfolio that reflects your personal beliefs and values. The key is to make sure the investments you choose are aligned not only with your values, but also with your financial goals, risk tolerance, and overall investment plan.

Investors in mutual funds and ETFs should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. Please read it carefully before investing.

Socially screened investments exclude certain investments and therefore may not be able to take advantage of the same opportunities or market trends as funds that do not use social screens. SRI, ESG, sustainable, impact, and similar strategies may apply environmental, social, governance, values-based, or other screening criteria differently, and investors should review a strategy's methodology and holdings before investing.