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Build Your Very Own “Socially Responsible” Portfolio

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Wouldn’t it be nice to know that your portfolio is not only earning a decent return but also helping make the world a better place?

That’s what socially responsible investing (SRI) is all about, in a nutshell.

Closely related to SRI is ESG, namely Environmental, Social, and Governance investing.

The E, for “environmental,” means the fund will seek out or exclude company stocks, ETFs, mutual funds, futures and options based on whether the organization works to prevent climate change, does not promote nuclear power production, and strives for sustainability.

There’s much debate about the second of those goals, nuclear energy production, with some arguing that new nuke plants are a smart way to avoid using fossil fuels and other “dirty” forms of energy.

The S, for social concerns, guides funds toward companies that work for human rights, employee diversity, general protection of consumer interests, and animal welfare.

The G, governance, refers to fair employment practices, democratic management structure and sensible executive compensation.

In an Investing Galaxy Long, Long Ago

Since the heady, early days of “socially aware” investing during the mid-1960s, the landscape of SRI has changed a lot.

The letters don’t even stand for the same thing, with most financial texts now declaring that they more aptly stand for “sustainable, responsible, and impact” investing.

The new variation is more on target and clearly describes the three core principles of SRI.

So if we accept the general meaning of “sustainable” as economic activity that promotes environmental good, what about those other two, much more relative terms: responsible and impact?

Which begs the questions: responsible according to whom, and having an impact on exactly what? 

Tough Questions with No Stock Answers

As many economists have pointed out, “investing for some reason other than profit” can mean as many things as there are people with money to invest.

My idea of “responsible” might mean avoiding investments in companies that make guns and war munitions, while someone else steers clear of corporations that sell animal-based foods. “Social responsibility is in the eye of the investor,” economists tell us.

Legendary consumer advocate Ralph Nader was famous for buying one share in every company listed on the New York Stock Exchange. He did that so he could personally attend annual shareholders’ meetings and harangue company officers who weren’t acting as responsible corporate citizens. The concept of “protest investing” was born.

Can investing in companies for reasons other than profit-making really do any good?

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And can avoiding “bad” corporate citizens (based on your own definition of that term) make any significant impact on the financial landscape? There are no solid answers to either question; each investor has to sort it out on a personal level before deciding where to park discretionary dollars.

Faith-Based Investing for Rewards in the Hereafter

A thriving subset of SRI is faith-based investing, the idea of using the guidance of one’s religious beliefs for the purposes of choosing companies to invest in.

Churches in the U.S. are non-profit entities, for tax purposes, but that doesn’t mean religious groups don’t invest. In fact, there are at least $80 billion of “faith-based” money floating around on Wall Street, most of which comes from Catholic, Islamic, Jewish, Protestant, and Buddhist organizations looking to place church funds where they’ll earn a tidy profit and align with deeply-held beliefs.

Guidance Funds is a favorite of Presbyterian groups, and seeks to locate Christian-based stocks that meet all the social and religious tenets of the Presbyterian General Assembly. That means no firearms producers, nothing alcohol related, and a strict ban on investing in companies that have any relationship to gambling or gaming.

For socially responsible Jewish investors, there’s the Calvert Fund, a mutual fund that focuses on companies that help small businesses and community-oriented efforts like affordable housing and similar goals. There are dozens of Talmudic references about using money for social good and being careful to diversify one’s capital. These principles are thousands of years old and were in operation long before Wall Street had paved roads.

Islamic funds avoid investing in five areas: porn, pork, alcohol, gambling and interest-earning entities. Of all the faith-based investing styles, Islamic funds are probably the strictest. Catholic funds seek out companies that support fair employment practices, human rights and environmental responsibility.

If You Build It, They Will Invest. Maybe.

When you set out to build your own SRI/ESG fund, you’ll need to do a decent amount of homework, and answer some soul-searching questions at the outset, some of which might include: How much profit am I willing to give up to build an SRI portfolio? Is it worth constructing a portfolio that might yield very little or nothing at all? Can the size of my investment have a significant impact on anything? Should I invest with others, or join one of the existing funds that only marginally align with my personal beliefs?

Positives and Negatives

The big SRI funds tend to seek out certain types of companies and avoid others. A small Buddhist investing group in the U.S., to cite one example, avoids companies that produce weapons, insecticides, pornography, and animal products. Those are its “negative” rules. On the positive side, the fund gravitates toward companies that aid the homeless, offer affordable medical care to low-income families, and work for world peace.

Build Your Own SRI/ESG Fund

It’s simple to construct a custom-made fund once you decide on your own set of positive and negative investment rules. In fact, those new to the SRI style of investing can simply use some of the big funds as a starting point, “stealing” stock ideas that have been pre-screened and vetted. For example, a Protestant investor wanting to construct a personalized portfolio might start out by looking at the current holdings in the Guidance Fund, and then adding or subtracting a stock or two based on a desire to invest in companies that research cancer cures or Alzheimer’s drugs.

For a comprehensive list of SRI/ESG funds, which you can use as a jumping off point for building a customized fund for yourself, here are some helpful resources:

Kiplinger’s 7 Socially Responsible Mutual Funds

Barron’s Top-Performing Sustainable Funds

ESG ETFs from Investment News

Several SRI Funds from Forbes

SRI/ESG investing is one of the fastest growing areas in the financial industry, as companies seek to find the perfect mix of “good” goals to attract the greatest number of investors to their particular fund. In reality, it’s a lot easier to study the components of the big ESG/SRI funds and then build your own portfolio from there.

Socially responsible investing means something different to each person, so why tie yourself down to someone else’s concept of the definitions of “good” and “bad.”

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