Socially Responsible Investing: What is it?

If you are passionate about a particular cause such as global warming, equal rights or firearm safety how
do you take action? Realistically, there are two entities than can enact widespread change: governments
and corporations. If you want political change you can protest, donate to a special interest or use your
vote.

Corporations are impacted by money. Corporations are influenced in two ways; how you spend your
money and investments. If you don’t agree with a corporation, you don’t have to purchase their
product, or you can avoid using their service. If you have a 401k plan or an investment account, you are
most likely invested in stocks which provide capital for corporations which in turn allows them to grow.
You may be indirectly helping a company that doesn’t share the same values as you do. For example, if
you are passionate about climate change and you own an S&P 500 index fund, you are investing in and
supporting oil companies. So, how can you invest based on your values?

In lieu of investing in traditional mutual funds, individual stocks or index funds, there are four main
options: Socially Responsible Funds, ESG Funds/ETFs, Thematic Investing and Impact Investing. Each one
of the four options have a different objective when it comes to values based investing. Let’s breakdown
the four options.

Socially Responsible Investing (SRI):

Socially responsible investing or SRI funds were originally created in the 80s in reaction to the women’s
rights and environmental movements of the 70s. Investors began demanding an investment option that
aligned with their personal values. SRI funds work by screening out certain industries. The most common
SRI industry screeners are firearms, tobacco, oil and gambling. There are also SRI funds that focus on
religious beliefs which they may screen out pornography or pork.

Where is the fit? SRI funds are good for investors that are looking to screen out particular industries
from their investment portfolio.

ESG Investing:

ESG stands for Environmental (Pollution, use of natural resources, energy consumption) Social (Health
and Safety, human rights, employee relations) Governance (Board independence, transparency,
executive compensation). ESG funds look to take SRI funds to the next level. Not only do ESG funds
screen out certain “bad” industries, but they apply an additional level of screeners that focus on a
corporation’s financial risk relative to the three ESG areas. If a company treats their employees well but
uses a produces a significant amount waste/pollution then they will be screened out of the ESG fund.

Where is the fit? ESG funds are good for investors that are looking to align themselves with companies
that have limited financial risks associated with ESG factors.

Thematic Investing:

Thematic investing looks at macro level trends and provides investors an outlet to invest in those trends.
Not all thematic investments are considered socially responsible such as investing in self driving cars, but
there are some socially responsible thematic investment options. If you’re passionate about climate
change, then you can invest in a clean energy fund.

Where is the fit? Thematic investing is a good fit for investors that are looking to invest in a specific
cause or a value of theirs.

Impact Investing:

Impact investing seeks to obtain a measurable sustainable outcome alongside an investment return.
Impact investing gives the investor the opportunity to make a specific investment in an area that is
important to them. Impact investing typically invests in healthcare, education, clean energy and
sustainable agriculture. With impact investing you can invest in green bond fund that provides capital to
build wind farms.

Where is the fit? Investors that would like to provide capital to specific areas that are in line with their
values.

As you can see, there are a variety of options to help you align your investments with your personal
values. Be sure to reach out to a knowledgeable professional about picking the right investments for
you.

In part two, we will examine how to evaluate the managers to ensure that a socially responsible
investment are actually socially responsible.

Derek Mazzarella, CFP® is an LPL Financial Advisor with Gateway Financial Partners based in Glastonbury
Connecticut.

Disclosure: All investing involves risk including the possible loss or principal. No strategy assures success
or protects against loss.

ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices
above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be
worth more or less than their original cost. ETFs carry additional risks such as not being diversified,
possible trading halts, and index tracking errors.

Exchange Traded Funds concentrating in specific industries are subject to higher risks and volatility than
those that invest more broadly.

Investing in mutual funds involves risk, including possible loss of principal. Fund value will fluctuate with
market conditions and it may not achieve its investment objective.