Thematic investing has been a popular concept for decades now. Plus, thanks to exchange traded funds (ETFs), you can gain exposure to any number of themes through the purchase of a single security. One of the most popular themes to develop over the last few years has been socially responsible investing, or SRI. Investors with an SRI mindset are looking for high returns from companies that promote sustainable and ethical practices. SRI allows investors to feel good about the stocks they buy since these companies are purportedly making the world a better place. But like anything else in markets, SRI can be contorted and many funds that claim to promote sustainability have questionable holdings.
If you need assistance with your portfolio, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.
Factors Associated With Socially Responsible Investing
You’ll often hear the term ESG thrown around when socially responsible investing pop-ups. This stands for Environmental, Social, and corporate Governance, which is a Wall Street way of wedging social issues into three neat categories. Socially responsible investing and ESG are used interchangeably in many places, but for the purposes of this article, we’ll discuss SRI as a personal style of investment and ESG as the vehicle to deploy capital.
Here’s what the three ESG categories mean:
- Environmental. This one isn’t too hard to decipher. Socially responsible investors look for companies with sustainability initiatives. Activities that contribute to climate change are high on the list of problematic elements, such as pollution, deforestation, and animal testing. Companies that curb waste and reduce resource consumption score well here.
- Social. The social aspect of ESG refers to how companies interact with both their employees and society as a whole. Does the company hire a diverse workforce? Do they have a history of violating consumer protection laws? Are harassment and discrimination penalties enforced? Companies that promote equality initiatives are ranked highly in ESG funds.
- Governance. Companies don’t just have responsibilities to society and their customers, but also the people who work for them. Governance concerns revolve around issues like executive pay, working conditions, and worker compensation and benefits. Recently, a company’s political lobbying and contributions have become sticking points for ESG investors.
Socially responsible investing doesn’t require strict adherence to ESG principles, especially if you plan on picking individual companies for your portfolio. ESG mutual funds and ETFs are often expensive and tend to track the same companies, but you might have a philosophy that differs from the fund manager.
Industries SRI Tends to Avoid
While socially responsible investors may differ on criteria for their investments, certain sectors raise immediate red flags.
ESG funds tend to exclude companies that operate in the following industries.
- Alcohol and Tobacco. Cigarette manufacturers are pretty much universally excluded from ESG funds, as are beer, liquor, and wine producers. Alcohol and tobacco have well-known health risks, and while that won’t stop folks from partaking, it will stop investors from buying.
- Gun Manufacturers. ESG funds tend to eschew companies that manufacture and sell guns, although this isn’t as universal as alcohol and tobacco. Many investors won’t purchase gun stocks because they feel manufacturers bear some blame for violence, while others believe responsible gun ownership falls within the ESG purview.
- Casinos and Sports Books. Sports betting is poised for growth in the United States, but you won’t find many ESG funds buying DraftKings or Caesars. Yes, it’s fun to bet on the Super Bowl or play a few hands of blackjack, but investors practicing SRI won’t buy casino or sports book stocks.
- Oil and Gas Companies. Some of the largest companies in the market like Exxon-Mobil and Chevron are also the most disliked by SRI. Companies that drill, mine, or remove resources from the earth tend to be looked upon unfavorably, especially a company like Exxon who bears responsibility for a host of environmental disasters.
Creating Your Own Socially Responsible Investing Plan
Like anything else on Wall Street, socially responsible investing has been somewhat hijacked and repackaged for retail investors to buy. Many purportedly-ESG funds look remarkably similar to large-cap stock funds or S&P 500 indexes.
If you’d like to take a more environmentally conscious approach to investing, be sure to contact your advisor and develop a plan that follows SRI principles. Many companies in ESG funds aren’t actually promoting these practices and a little research and cost/benefit analysis is always needed.
Work With an Experienced Financial Advisor
If you have any questions about socially responsible investing, reach out to a team member from Good Life Financial Advisors of Mount Pleasant today! We’re happy to assist you.
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.
Socially Responsible Investing / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons, and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.