Amazon’s inhumane working conditions in its fulfillment centers. Palantir software used by ICE to deport immigrants. ExxonMobil and other oil companies spewing emissions and drowning seabirds. Nestle lying to third-world mothers about baby formula.

The list of crappy things corporations have done in just the last decade is seemingly endless. Unfortunately, these unethical corporations usually get away scot-free with minimal impact on their profits and revenue in the long run.

Logically, this makes sense. Companies that are willing to do the shady business to increase their profits will perform better. Even if they are caught, they’ll just lawyer up and endure a week or two of bad PR because reading about Amazon’s awful working conditions hasn’t prompted anyone I know to cancel their Prime subscription.

However, this does put investors in a little bit of a dilemma. What if you want to invest your money wisely but also not directly contribute to things like child labor?

Enter socially responsible investing (SRI).

SRI is also known by other names such as green investing, ethical investing, sustainable investing, etc (you get the idea). These strategies are centered on what it sounds like: investing your money in companies and funds that impact the world positively (or at least not negatively).

SRI has always been a thing, but in recent years it’s gained more traction due to the public’s greater access to information and social awareness. Additionally, millennials, which are a growing demographic of investors, weigh in social factors more heavily than previous generations. Currently, 1 in 4 dollars under asset management is invested using socially responsible strategy. That’s $12 trillion, and trends show that this number is only going to increase.

However, increasing popularity doesn’t answer the most important question in investing: Does it make you money?

One way to answer this question is to look at social index funds. Index funds essentially try to mimic the performance of an index, like the Dow Jones or S&P 500, through buying all/most of the stocks that the index tracks. 

Social index funds compile stocks of companies that adhere to SRI values. These funds typically exclude companies involved with tobacco, alcohol, and fossil fuels. Other than just what a company produces, some funds also take into account working conditions, corporate diversity, and other factors.

One such fund is the Vanguard FTSE Social Index. In the last five years, it has had annualized returns of 13.4% which is slightly more (0.8% higher) than the S&P 500’s 12.6% annual returns. Other than the Vanguard FTSE, there are plenty of other funds out there such as the iShares ESG Select ETF, which tracks the 105 companies with the highest SRI scores, and the SHE ETF, which chooses companies that “are leaders in advancing women through gender diversity on their boards of directors and in management.” All of these have had similar returns compared to the S&P 500 over the years.

Ultimately, using SRI strategy gives a respectable financial return. Does it beat the S&P 500? Sometimes. Does it perform worse than the S&P 500? Sometimes. Basically, SRI isn’t going to drastically change your financial return in comparison to standard investing, but it will make you feel like a good person.

So in all, I really recommend you practice SRI if you choose to start investing. The returns are on par with that of other funds, more and more SRI funds are opening, and even if you lose all your money, at least you can say that you didn’t sponsor global warming or the next nicotine epidemic.

Sources:

https://www.cnbc.com/2019/05/06/socially-responsible-investing-is-hot-with-no-signs-of-cooling-off.html

https://www.kiplinger.com/article/investing/T041-C009-S002-7-great-socially-responsible-mutual-funds.html

https://money.usnews.com/investing/slideshows/7-of-the-best-socially-responsible-funds?slide=2

https://www.ussif.org/sribasics