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How Retirees Can Add A Socially Responsible Angle To Their Portfolio

A dollar isn't just a dollar—it's an extension of your values. 

Many prioritize the connection between where they spend their money and how they invest, leading to a surge in Socially Responsible Investing (SRI) and a higher focus on Environmental, Social, and Governance (ESG) criteria. 

With more retirees looking to add these elements to their portfolios, how can they do so in a way that makes sense?

Understanding Socially Responsible Investing

Socially responsible investing (SRI) is a type of investment philosophy that prioritizes ethical, social, and environmental concerns to guide investment decisions.

SRI can apply to individual stocks, mutual funds, or entire portfolios. Institutions such as pension funds and nonprofits often use it to align their investments with their missions, and individuals can use these guidelines to build wealth and make the world a better place.

The term socially responsible investing was first used in the 1970s to describe the practice of avoiding investing in companies associated with alcohol, tobacco, gambling, or other industries considered detrimental to society. Today, however, SRI encompasses a broader range of issues, including labor practices, environmental well-being, and community impacts.

Many investors use SRI to avoid unethical behavior by corporations or industries they support or evade companies whose products they find objectionable or offensive. For example, investors might not buy shares in oil companies because they disagree with drilling for fossil fuels. 

Another category of SRI is what's known as "positive screening," which means that investors focus their efforts on particular companies or industries instead of avoiding or eliminating exposure to industries. For example, investors might want to buy shares in companies they think are good for the environment, like renewable energy, or companies that align with their personal values or faith.  

The State Of SRI Today

There are a growing number of investment companies that specialize in ESG investing. Environmental, social, and governance investing has become so popular that many large financial institutions have made it a core business model. 

The size and influence of these institutions have helped make ESG an essential consideration for investors in all types of portfolios. In fact, 58% of respondents to a survey by Investopedia and Treehugger indicated increased interest in ESG investments in 2020, and19% reported using ESG considerations in selecting investments.

So what does ESG mean?

Environmental, Social, and Governance (ESG) Criteria Can Help

Socially responsible investing (SRI) is an investment strategy that incorporates environmental, social, and governance factors into the investment process. Investors use ESG criteria to evaluate companies.

ESG factors are the most common for identifying socially responsible companies because they're broad enough to cover a wide range of issues but specific enough to be meaningful. They also allow investors to incorporate personal values into their investment decisions.

The main ESG criteria are:

  • Environmental - The impact businesses have on the environment, including climate change, water use, pollution prevention, and waste management practices.
  • Social - The treatment of employees, including wages and benefits, human rights violations, community involvement, philanthropy, and corporate governance practices,
  • Governance -  Corporate governance practices such as board diversity and executive compensation. 

There are many ways to invest responsibly. Some investors choose mutual funds that are screened for ESG criteria, while others may look at individual stocks or ETFs that align with their goals. 

How Can You Intentionally Add SRI To Your Portfolio?

There are many ways to add a socially responsible angle to your portfolio, but first, let’s review some investing best practices.

  • Start small. You don’t have to revamp your portfolio overnight; even starting with one socially responsible mutual fund or exchange-traded fund (ETF) can make a big difference over time.
  • Understand your goals. Do you want to avoid specific industries? For example, you may want to refrain from offering financial support, whether directly or indirectly, to companies that veer from your values set, like tobacco. Or would you prefer to prioritize certain industries/companies? For example, you could invest in renewable energy like wind or solar if environmental issues are essential. Or eco-friendly home builders who use sustainable materials such as bamboo flooring instead of hardwood floors made from trees felled in rainforests (a major contributor to global warming).
  • Don’t forget about diversification. Values-based investing doesn’t mean leaving common sense at the door. You must still prioritize a diversified portfolio that aligns with your risk tolerance, risk capacity, timelines, and goals. Applying the core tenets of a strong portfolio will help set you up to reach your goals. 
  • Watch for investment prices. In retirement, you want to ensure you’re not overspending on your investments. Some SRI funds can be more expensive than others, so be sure you understand the fees completely before buying. 

SRI Long-Term Performance Beats the Market

There has been a stubborn myth that socially responsible investing has yet to produce good returns. While 2022 has been turbulent for the entire market, including SRI, entering 2022, ESG strategies outperformed the broad market for several years.  

Still, viewed over a longer time horizon, SRI strategies hold their own. 

The Morningstar sustainability index, for example, averaged an 8.7% return per year for the last five years, essentially even with the US Market Index.

While past performance doesn’t indicate future results, it’s promising to see the positive trajectory of SRI and that you don’t necessarily have to sacrifice returns to invest in the things most important to you. 

Connecting Your Money With Your Life 

Socially responsible investing is gaining momentum and can be alluring for many retirees. This strategy can help bring meaning and purpose to every dollar when used appropriately. 

We hope we've given you some good ideas as you consider adding this type of investing into your life and portfolio. As you can tell, there are many options for socially responsible investing. We can help you navigate those choices and get your portfolio aligned the way you want it.