What is socially responsible investing?

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Editor’s note: This story comes from Wealthramp.

When you decide to invest in stocks, do you care whether your money is invested in stocks that are considered socially responsible?

Do factors such as how the company treats its employees or its use of toxic chemicals in manufacturing influence your decision whether or not to invest in the company?

Socially Responsible Investing, also known as Sustainable Investing, is investing your money in companies that actually contribute to the greater good of society, whether it’s helping their own employees, making an effort to clean up the planet or take action to solve the world. problems.

Here’s an overview of what that means and how to judge if it’s a good idea.

Socially responsible investing incorporates ESG factors

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A successful investment requires a long-term commitment. It’s not just about avoiding owning stocks of tobacco companies or payday lenders, these investors consider three key factors when deciding where to put their money: environmental, social and governance (ESG) . If you are an ESG investor, you want to know:

  • Environment — What is the impact of the company on the environment? Does it implement green energy initiatives? How does it deal with carbon emissions, waste management and water pollution?
  • Social — How does the company treat its employees? Does it have policies on sexual harassment? Does it practice diversity and inclusion and fair labor practices? What is its human rights record?
  • Governance — How diverse is the company’s board and management team? What are the company’s political contributions? How do its existing shareholders feel?

Socially responsible investing is also making a difference

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But socially responsible investing goes beyond a company’s ESG factors. Other strategies considered for sustainable investing include:

  • Impact Investing –Impact investing is when you invest in companies that focus on social and environmental impact. For example, investing in electric car companies like Tesla or sustainable agriculture companies like Bioceres Crop Solutions.
  • Activist investment — An activist investor buys a large amount of stock in an underperforming company to influence the company and its management to take specific actions to increase the value of its stock.

Socially responsible investing is not a fad

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Once considered a niche investment strategy, socially responsible investing is now seen as more mainstream, especially among millennials and women.

According to Morningstar’s Sustainalytics, $70 billion was invested in ESG funds in 2021. That’s about 14 times more than three years ago. The number of sustainable funds and ETFs available to invest has also increased three times more than three years ago.

As this momentum builds, women continue to lead the socially responsible investing movement. A recent Cerulli Associates poll found that 52% of women preferred to invest according to their values ​​by owning shares in companies that have a positive track record for social or environmental impact, compared to 44% of men.

And the returns? You can earn money and make a difference

Equity investor
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You don’t have to be a hippie to jump on the socially responsible investing bandwagon. You also don’t have to sacrifice investment returns to invest sustainably.

Over the past two years, socially responsible funds have performed as well as, if not better than, conventional funds. S&P Global Market Intelligence analyzed the performance of 26 exchange-traded funds (ETFs) and ESG mutual funds during the first 12 months of the COVID-19 pandemic and found that 19 outperformed the S&P 500 .

Socially responsible investing is also becoming much more accessible to individuals. In fact, you might now find ESG funds added to your own 401(k) plan. The US Department of Labor has proposed regulations that would allow trustees to consider ESG factors when selecting investments for your employer’s retirement plan.

The number of opportunities to invest in shares of companies deemed to be socially responsible, and in an inexpensive way, is multiplying. These are just a few ETFs to consider if you’re interested in socially responsible investing.

  • iShares Global Clean Energy ETF (ICLN) — This ETF includes companies around the world that generate “clean energy” from solar, wind and other renewable sources. Holdings include Enphase Energy Inc., SolarEdge Technologies Inc, Vestas Wind Systems, Plug Power Inc. and First Solar Inc.
  • Shelton Green Alpha Fund (NEXTX) — Green economy enterprises that “improve human well-being and increase economic efficiency, while significantly reducing environmental risks and ecological scarcities” are included in this ETF. Holdings include Tesla, Moderna, Applied Materials, IBM and JinkoSolar Holding Co. Ltd.
  • AllianceBernstein Sustainable Global Thematic Fund (ATEYX) — This fund identifies sustainable investing themes that are broadly consistent with achieving the United Nations Sustainable Development Goals, such as health, climate and empowerment. He owns 30 to 60 stocks, including Waste Management Inc., Deere & Co., Microsoft Corp. and Apple Inc.
  • iShares ESG Aware MSCI EAFE ETF — This fund exposes you to large and mid-cap stocks from Europe, Australia, Asia and the Far East that have favorable ESG ratings. Holdings include Nestlé SA, Roche Holding Par Ag, Shell PLC, Novartis AG, AstraZeneca PLC and Toyota Motor Corp.
  • First Trust Global Wind Energy ETF (FAN) — This ETF focuses on wind energy companies around the world. Included companies are actively engaged in some aspect of the wind energy industry, such as developing or operating a wind farm, generating or distributing electricity generated by wind energy, or participating the design, manufacture or distribution of machinery or materials designed specifically for the wind energy industry. Holdings include Northland Power Inc., Vestas Wind Systems, Engie, Boralex and Innergex Renewable Energy Inc.

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