Socially Responsible Investments

When you invest, you’re voting with your money. Despite what happens in Washington D.C., you can always make a difference. Setting up a socially responsible investment (SRI) portfolio is easier than you think. Socially conscious investment strategies have been around for hundreds of years. With above average returns and the positive impact made, SRI is becoming more and more popular.

SRI focuses on environmental, social and corporate governance (ESG) that create positive social impact. It’s also referred to as green investing, community investing, ethical investing, responsible investing or sustainable investing. A socially responsible investment portfolio can be built in many ways. You can narrowly focus on a select local causes, invest broadly in global companies, or create an entire portfolio in devoted to a diversified SRI strategy.

The fact that so few of the investment advisors I have worked with over the years work with SRI is troubling. Social responsibility is a growing opportunity for investors.The Forum for Sustainable and Responsible Investment shows that $8.72 trillion in managed assets used sustainable, responsible or impact investment strategies in 2016. Think about that for a moment. Trillions of dollars in an investment strategy that’s decades old… and yet I worked with hundreds of financial advisors that were completely unaware that SRI even existed.

environmental, social and corporate governance assets

Why Wall Street is Behind on SRI

My guess as to why this is that this has less to do with profitability and more with corporate culture. SRI has outperformed the S&P 500 for decades. From 1990 through 2015, the socially responsible Domini 400 index fund (MSCI KLD 400) had an average annual return of 10.46%. In comparison, the S&P 500 fund (SPX) averaged 9.93% for that same period. Simply put, social responsibility is a money-making strategy.

There are a few factors that I believe are behind the lack of knowledge and interest in social responsible investments. The Wall Street mentality is the to primarily blame. Wall Street focuses on profit above all else.  Banks don’t make money off an investment like you would. Instead, they make their money off sales and management of investment products.

Financial Advisor SRI Awareness


Socially responsible funds often are prohibited from investing in companies that offer alcohol, tobacco, firearms, those that contribute to climate change, or those holding certain political views. For a salesman, it's a risk to discuss an investment that may turn off a potential client. I know this to be a fact; the only time the salesmen ask me about SRI was when the client asked first.

Another reason SRI is slow to become mainstream is that a majority financial advisors tend not to align philosophically with ESG investing. Changing that philosophical leaning is difficult. Over 86% of financial advisors are men that are over the age of 50. In contrast, SRI is primarily being driven by younger investors.  Considering that young talent has been avoiding careers in the investment field, it's going to be difficult for the banks to adopt a socially responsible mindset.

SRI is (Part of) the Future of Investments

Sometimes, you just need a drink. Or a smoke. It’s a free country, and the way you invest isn’t going to change that. Building a SRI portfolio is your choice too.

If environmental, social and corporate governance is important to you, we can work together to build a focused strategy. That doesn’t mean traditional investments would be excluded if you make the decision to invest responsibly. Nor does it mean your version of socially responsible will be the same as another investor.

ESG 10 year investment comparison

There is no right or wrong way to invest. While socially responsible investment has proven to be profitable, socially irresponsible investing can make just as much money. The chart above compares returns of the vice fund USA Mutuals Vice Investor (VICEX) to the iShares MSCI KLD 400 Social ETF (DSI). VICEX invests in guns, gambling, cigarettes and alcohol… basically, it focuses on people’s vices. DSI is a socially responsible index. While these funds have completely opposite investment strategies, the investments provided similar returns over the last decade.

The performance of these two investments would appear to show that the only benefit to SRI is a clean conscience. While that may be an important factor in deciding to invest responsibly, you can't ignore the future growth potential of these investments. In the last decade, we’ve seen socially responsible companies explode in growth.

Despite the current political climate, social responsibility will continue to make strides. For example, the solar industry is currently creating jobs 17 times faster than the rest of the U.S. economy. At the same time, the coal industry has lost hundreds of thousands of jobs. It now employs fewer workers than Arby’s.

Wall Street is even starting to realize the benefit of socially responsible investments. Lloyd Blankfein, the CEO of Goldman Sachs, released his first tweet ever affirming his support of the international fight against climate change. It took five years to him to use his Twitter account, proving that Wall Street is (slowly) starting to catch on.

ESG SRI assets

Social responsibility isn’t the future because it makes investors feel good. Part of why Wall Street is adopting social consciousness is the fact that more money is being invested in SRI. The amount of money and fund choices has steadily risen over the years. This influx of cash will be a driving factor behind the increasing value of ESG share prices in the future.

Not every company will embrace ESG. This limits investment options, but that scarcity will push the value of companies that meet the standard up over time. Additionally, companies that don’t fit into the category will lose value as investors look for options aligned with their beliefs and values.

Think about that fact for a moment. If you’re presented with two diversified portfolios that achieve similar long-term results, either will get you to your financial goal. However, if one of those options invested in causes you personally believe in, why would you choose the other? More people, especially younger investors, are making the decision to make money while making a difference.

Starting a Social Responsible Investment Strategy

How one goes about building a socially responsible portfolio is up to the individual. The principles that apply to building a diversified investment portfolio are no different from those behind a socially responsible one. The use of individual securities, mutual funds and exchange traded funds allow you to personalize investment options. Before you start, some questions need to be answered.

As with a traditional investment strategy, you need to be considered your comfort with investment risk and the timeframe for the investment. You’ll also want to clarify which social causes you’re supporting and how committed you are to these causes.  The later question will help your financial advisor decide if they need to exclude investments that run contrary to your beliefs.

Answering these questions will determine if you should be completely invested in ESG funds or if a core-satellite approach is more appropriate. Additionally, it answers another question. Should investments only be made in companies that meet or exceed ESG criteria, or can the portfolio hold those that are actively working towards meeting that criteria? These questions not only create investment guild lines to follow, but they will also help set expectations for investment returns.

SRI used to suffer with a perception for poor investment performance. Northern Trust Asset Management’s Senior Investment Strategist Adbud Nimeri, PhD recently explained why this was. He reasoned that performance suffered from the exclusion of companies that had not yet met ESG criteria even if they were working toward that goal. An example he cites is the Norwegian sovereign fund. It used a SRI strategy that had exclusionary investment tactics, causing the performance to fall 1% behind other ESG portfolios.

If that’s the tradeoff, you have to ask if your commitment to a cause outweighs a higher return on investment.

How to Invest in SRI

SRI Investment Strategies


Individual Securities

Individual securities, which include stocks and bonds, offer an investor the most control over what kind of investments are chosen for a ESG portfolio. The creation of a portfolio that uses individual securities has several advantages over other investment options. The main advantage is that you can pinpoint the exact companies and causes you desire.

This means that you can include or exclude industries to meet your criteria easily. It also means that you can include local investment opportunities. Here in Phoenix, you can find local companies on Local First Arizona. These investments not only help your community, but offers opportunities that large national or global investment fund managers may fail to notice.

There are several downsides, however. The first is that building a diversified portfolio, which should consist of a minimum of 20 securities, is difficult when using individual stocks and bonds. Next, there is a greater commitment of time needed to manage a portfolio of individual securities. Commissions, trading fees and taxes incurred through trading or rebalancing can also reduce returns.

Finding socially responsible companies to invest isn’t that difficult. There are many that have adopted or are working towards ESG standards. Social responsibility can take many forms. For example, after President Trump pulled the U.S. out of the Paris Climate accord, the following companies expressed their opposition to the decision:

  •, inc. (NYSE: CRM).
  • Tiffany & Co. (NYSE: TIF).
  • Adobe Systems Incorporated (NASDAQ: ADBE).
  • Apple Inc. (NASDAQ: AAPL).
  • Anthem Inc (NYSE: ANTM)'s Blue Cross Blue Shield of Massachusetts.
  • Hewlett Packard Enterprise Co (NYSE: HPE).
  • Ingersoll-Rand PLC (NYSE: IR).
  • Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL).
  • Facebook Inc (NASDAQ: FB).
  • Gap Inc (NYSE: GPS).
  • Intel Corporation (NASDAQ: INTC).
  • Unilever plc (ADR) (NYSE: UL).
  • Microsoft Corporation (NASDAQ: MSFT).

Separately Managed Accounts

One option that would simply social responsible investing in individual securities is the use of a separately managed account (SMA). A SMA is a portfolio of assets under the management of a professional investment firm, most often a registered investment advisory (RIA) firm operating under the Investment Advisors Act of 1940. The RIA provides day-to-day professional portfolio management.

The greatest benefit to using a SMA is the fact that they’re highly customizable. For example, the Forum for Sustainable and Responsible Investment has over 100 SMA strategies that can be tailored to an individual’s goals. If you look through the forum’s list, however, the downside of separately managed accounts becomes apparent.

SMAs are targeted towards high net worth investors. Typically, these funds require a minimum investment between $100,000 and $5 million. Asset management fees differ from firm to firm, though a regulatory filing known as Form ADV explains the fee structure. Luckily, there are more cost-effective ways to invest in ESG funds.

Mutual funds and Exchange Traded Funds

Socially responsible mutual and exchange traded funds are the easiest option for ESG investors. The majority of financial advisors use mutual funds for SRI, though ETFs are growing in popularity. Most investors are already familiar with both mutual funds and ETFs. This makes the options easy to understand. On top of that, there are lower initial investment amounts needed.

The advantage to using them is that they offer low-cost, highly diversified investment solutions. The tradeoff it that the investments are either chosen by a fund manager or replicate an index. This means that the investor doesn’t have the personalized control available with individual stock selection or SMAs. If the investment criteria set by the investor is narrowly focused, the fund screening process for selecting investments needs to be more rigorous.


Many believe that we are now in a political climate that is anti-climate, anti-science and in favor of deregulation. Even if this is the case, social responsibility is not going away. Companies embracing SRI will continue to gain market share while those that do not slowly fade.

Wall Street banks aren’t known for putting social responsibility ahead of profit. If you want to build an investment strategy that balances your future goals and personal convictions, it’s important to work with someone who understands your focus. Building a diversified investment portfolio that fits both your goals and your beliefs takes time, but the results are worth it.

If you would like to discuss socially responsible investing further, please contact me.