You Can Build a Portfolio You Love and Invest Responsibly

by Bola Sokunbi |October 9, 2020

The impact of our investments has the power to make big changes.

Not only can thoughtful investing completely transform your financial trajectory, but it can also help you make strides toward building a future that you believe in.

With socially responsible investing, you can choose to stake and support companies with missions meaningful to you. Instead of putting your money into companies that don't align with your values, socially responsible investing guides you to build — or diversify — your portfolio in ways that conform to your beliefs.

As the world continues to change around us, more people are becoming aware of socially responsible investment options. According to the 2018 Global Sustainable Investment Alliance Report, assets managed with sustainable investing strategies now represent 26% of all investment assets under professional management in the United States. If you are passionate about using (and potentially growing) your money to further causes and business practices that you care about, then socially responsible investing could be a great approach to incorporate into your financial strategy.

Let's dive into the concept of socially responsible investing, including how to assess if companies are socially responsible and how you can apply it to your financial future.

Close up of a man's hand holding fresh tea leaves

What is socially responsible investing?

Socially responsible investing looks beyond the numbers behind a company to also focus on and consider the value of its societal impact, as evidenced by environmental, social and governance (ESG) criteria. While traditional investing can benefit your long-term financial well-being, socially responsible investing can help you reach money goals as well as further connect you to industries and businesses committed to benefiting society.

As an investor, you'll have the ability to work toward changes that you believe in. For instance, you'll be able to use your voice and power as an investor to shape the future of a company through shareholder voting and participate in the company's potential success that may include dividends.

What are the advantages of thinking like a socially conscious investor?

Thinking like a socially conscious investor can help you uncover environmental, social and governance (ESG) issues that you might otherwise not have considered as a traditional investor. This way of thinking ensures you stay aligned with your values, putting positive social impact ahead of profits. It can also save your portfolio from potential long-term losses as a result of leveraging ESG criteria in your risk assessment.

"Socially responsible investing represents a unique way to ensure more thorough risk analysis for investments, while at the same time ensuring that sustainable business practices withstand the test of time," says Jenny Coombs, associate professor at The College for Financial Planning, CSRIC® and the founder of GradMoney, an investing education platform.

Coombs goes on to add that, "Looking at investments through a sustainable lens means picking up on risk factors that might be overlooked using traditional financial analysis. For example, an investor with exposure to beachfront property investments in Miami might have a profitable portfolio today, but the increased frequency and severity of hurricanes and tropical storms is a risk factor that would be uncovered using environmental, social and governance (ESG) criteria."

Essentially, if this beachfront property was built without taking its surrounding ecosystems into consideration or without climate resilience features, over the long term it could be a loss for your portfolio in addition to being impactful to the environment.

Community benefit

With community-focused investments, where your investments go towards creating opportunities for disadvantaged demographics, you can have a big impact on a local economy. The Minority Business Development Agency reports there are nearly 11 million minority-owned businesses employing more than 6.3 million people in the United States. Through community-based investing, you have the ability to create more opportunities in areas that matter to you.

Access to capital

Microfinancing provides capital to small businesses and individuals who lack access to the necessary funds needed to grow their businesses. Although these loans are usually of a relatively small dollar amount, they can have a very big impact on the financially marginalized. In fact, many tout the abilities of microfinancing as a way to lift women and families out of a cycle of poverty.

Sustainability

The Earth has a finite quantity of natural resources that are needed to support humans around the globe. Without a sustainable approach to the consumption of these resources, the balance of ecosystems around the world can go off the rails. Not only could that have devastating impacts on the environment, but the economy could suffer in the long term. With that in mind, an environmentally conscious investor would choose to invest in companies committed to an environmentally sustainable business model. That might include looking at the way the company uses natural resources or how it fuels its operations and its treatment of animals.

Governance

When you consider the governance criteria of a company, you are evaluating whether or not you agree with the way that the company is run. With that, you might run into a variety of ethical issues. Examples might include the fairness of the payment structure or the accountability methods within the company.

According to Adeola Omole, an independent investor and wealth coach, "I would much rather invest in ethical companies that set a higher bar for themselves and their stakeholders, versus investing in a company that is behaving poorly and is willing to cut corners." She also adds, "For me, investing extends far beyond just purchasing a stock in a company, but also includes investing in companies that are good stewards of the environment, and that treat their employees and stakeholders well."

Frameless solar panels, battery energy storage facility, wind turbines and big city with skyscrapers

What should I look for in companies when investing?

As you plan out your values-based budget and look for companies to invest your money in, it is important to follow your own set of values. But it can be helpful to look for well-known markers that will indicate a company's socially mindful bona fides.

Let's take a closer look at some of the certifications that can help you spot socially responsible companies.

B Corp

When a company has obtained a B Corp certification (the "B" stands for benefit), it has proven that it's serious about tackling society's biggest issues. Typically, these businesses are working to reduce inequality, protect the environment and build stronger communities. Not only are the products and services offered by theses business evaluated, but so are their internal operations.

Fair Trade

When a company provides Fair Trade products, it is supporting efforts that protect the environment and empower farmers. The seal is only granted to products that are able to meet high social, environmental and economic standards. If a company spends the time and energy to make products that meet this high level of social responsibility, then you might feel more comfortable investing in its mission.

Energy Star

The Energy Star symbol is a government-backed certification that shows a product or building has been designed to be very energy efficient. With that, the company behind them is making an effort to protect the environment. Since the goal of the Energy Star certification is to reduce greenhouse gas emissions and other pollutants, companies that are making the effort to meet these standards are moving toward reaching those goals.

FSC

Forest Stewardship Council (FSC) certification shows that a product has been sourced from a responsibly managed forest. By using this certification, companies show a commitment to conservation efforts.

Rainforest Alliance Certified

In a similar vein, Rainforest Alliance Certified products are sourced from a farm or forest which meets standards that require meaningful steps toward long-term environmental, social and economic sustainability. Not only does the certification symbolize a balanced approach to conservation and managing the ecosystem, but also an effort to improve rural livelihoods and human rights of rural people.

How to invest in a socially responsible way

Ready to begin? Here are three key steps to consider as you get started.

1. Think about your criteria ahead of time

As you start to map out your socially responsible investment portfolio, take some time to think about what you want to achieve with your investments. It might help to create a list of goals that you are looking for companies to support. Maybe you want your funds to help create opportunities in your community. Maybe you want to work with companies that are treating the environment like a top priority. And, of course, you want your funds to grow over time. There is no right or wrong way to build a socially responsible investment portfolio. But without a thoughtful approach, researching your options can be overwhelming.

2. Consider mutual funds

Mutual funds are a useful way to invest because you'll have the opportunity to access the profitability of a range of companies. That can help to distribute your investment across multiple companies instead of putting all of your eggs into one basket. Luckily, many investment platforms are now offering socially responsible mutual funds. But before you blindly invest in a mutual fund that is billed as "socially responsible," make sure to do your homework. Otherwise, you might find yourself invested in companies that you don't want to support.

3. Research individual companies

It is completely possible to gather the basic financials of a company from the U.S. Securities and Exchange Commission (SEC) to figure where a company spends its money. Additionally, you can read their story and fact check it when possible. Don't simply accept the story of a company at face value, dig a little bit deeper to make sure that nothing shady is going on.

Although researching individual companies can be more time-consuming, it is the best way to ensure that your investments are furthering values that you care about. A time-efficient research approach is to look at basic markers first. For example, you could start by only considering investments with Certified B Corps or monitor a company's environmental impact.

"Your portfolio should reflect investments in organizations or causes that you believe in, such as avoiding companies that derive much of their profits from fossil fuels or investing in companies that support and implement strong diversity initiatives." advises Coombs. "There are also mutual funds and ETFs (exchange-traded fund) that offer a way to gain exposure to sustainable investments with minimal effort, just be sure to read up on the fund initiatives in the prospectus to make sure they are in fact seeking sustainable investments," she adds.

Is socially responsible investing economically viable?

Socially responsible investing might sound like a dream come true. After all, you'll have the opportunity to support causes that you care about while building an investment portfolio designed to meet your long-term financial goals. You might be wondering if it is actually possible to balance economic viability with social responsibility.

Although it may take more effort to build a profitable investment portfolio with your social responsibilities in mind, it could be worth it in the long term. You'll be building a portfolio with the potential to sustain yourself while making the world a better place.

Bola Sokunbi

is the founder/CEO and author of Clever Girl Finance, a financial education platform and community for women empowering them to achieve financial wellness and live life on their own terms.

The content reflects the view of the author of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article.

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