Can you make money through socially responsible investing? Here’s what the numbers say.
Socially responsible investing (SRI) is the secret agent of the investment world. It can hide in plain sight, get lost in the shadows, use any number of other names, like ethical investing, sustainable investing, or impact investing.
Like a good secret agent, socially responsible investing can take on different personas and speak to varied audiences. The good news is the socially responsible investments probably aren’t going to go through your drawers and photograph all your files. So it’s actually better than a secret agent!
Joking aside, one of the concerns that comes up a lot with this approach to investing is whether it’s profitable. That’s fair since we would all like to make profits from our investments. You might be surprised by what the numbers look like.
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The cold, hard facts about socially responsible investing
First, what is socially responsible investing? There’s no single answer to this, but there is at least one common factor: Socially responsible investments are made into companies, organizations, and funds to generate a measurable, beneficial social or environmental impact alongside a financial return.
The concept includes investing in companies that fight against climate change, advocate for renewable resources, want to create a more equitable world, eschew ‘sin’ stocks (gambling, alcohol, tobacco, guns, even marijuana), and those that promote ethical work practices, a diverse board of directors, and gender equality.
If you’re looking at ETFs or mutual funds, they, like the definition, are all over the place. There are broad impact funds that try to cover all the points from sustainability to gender and social equity. Others are laser-focused. Just like you might invest in a marijuana ETF, you can find ETFs specific to renewable energy. You can even get highly specific with ETFs that focus solely on solar or wind energy.
What does all this look like in real life? As an example, the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) has a return of 15.49% since its inception. As you can probably guess by the name, this ETF focuses on large-cap companies that limit exposure to fossil-fuel stocks.
The iShares MSCI ACWI Low Carbon Target ETF (CRBN) has a return of 10.15% since its inception. This ETF includes a selection of globally-sourced stocks with low carbon emissions.
With the SPDR SSGA Gender Diversity Index ETF (SHE), you’re looking at a 14.45% return since inception. Again, the fund’s name makes it clear that these are stocks of companies that have a large percentage of female employees or senior leaders.
As a point of comparison, the SPDR S&P 500 ETF Trust (SPY) has a 10.19% return since inception, and the Vanguard Total Stock Market Index Fund ETF Shares (VTI) is only at 8.48%.
Here are a few additional points you might find interesting:
- Sustainable equity funds outperformed conventional peers in negative market conditions.
- In one of Morningstar’s sustainable investing reports, results indicated “that 63% of sustainable funds finished […] in the top half of their respective categories.”
- Solar capacity is forecast to more than double over the next five years.
- Some SRI ETFs offer minimal risk with higher returns.
That’s great if you like ETFs or want to broaden your exposure to a given segment. But, of course, we’re always interested in individual stocks.
What about individual stocks?
There’s no simple way to get into individual stocks that fall into the socially responsible investing category. There’s just so much here, from solar to electric vehicles to ethical banking and companies in just about any industry you could imagine.
One straightforward approach would be to find an ETF you like and see what they’re holding. Just as an example, we can look at the iShares Global Clean Energy ETF (ICLN). They have SolarEdge Technologies Inc (SEDG) and Plug Power Inc (PLUG) among their top holdings. Or, if you look at SHE, some of their top holdings include Texas Instruments Inc (TXN) and Square Inc. (SQ), which may be slightly better-known names.
Just remember, finding them on a socially responsible investing ETF doesn’t automatically make them good stocks. You still need to do your homework and figure out if it makes financial sense to invest in them. That goes for ETFs, too. And check that expense ratio! There are some ETFs that have an expense ratio high enough to negate any dividend benefits.
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Do you have investments that fall into the socially responsible category? Hare are they performing for you?
