Socially Responsible Investment (SRI) Options: Aligning Financial Goals with ESG Impact Without Sacrificing Return

Socially Responsible Investing (SRI) offers a compelling strategy for investors who want to generate financial returns while also supporting social, environmental, and ethical causes. The beauty of SRI lies in its ability to align your investment portfolio with your values, from environmental sustainability to social justice, all while aiming to provide competitive financial growth. The misconception that socially responsible investing requires a trade-off between financial return and social impact has been dispelled as SRI options have evolved. Today, investors can participate in SRI without sacrificing their financial goals.

In this blog, we’ll explore the different SRI options available, discuss the various degrees of screening and shareholder engagement, and highlight how these strategies can offer diversified, customizable solutions without compromising financial returns.

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   Key SRI Approaches: Screening, Shareholder Advocacy, and Community Investing

   
   

Socially responsible investing generally includes three primary approaches:

A.         Screening: Aligning Investments with Values: Screening is the process of selecting investments based on specific social, environmental, and ethical criteria. There are two types of screening approaches:

• Positive Screening: This focuses on investing in companies that have robust Environmental, Social, and Governance (ESG) practices. These companies are proactive in making a positive impact on society, the environment, and corporate governance.


• Negative Screening: This avoids industries with potentially harmful impacts, such as fossil fuels, tobacco, and weapons. Negative screening ensures that investors’ money does not fund businesses involved in sectors that contribute to societal harm. This method screens out companies whose business models directly contradict investors’ ethical or environmental priorities.

Screening allows investors to align their portfolios with their values, ensuring that their investments reflect their ethical or environmental preferences. While some funds use stringent screening criteria to avoid harmful industries, others may take a more flexible approach, engaging with companies regardless of industry and advocating for better ESG practices from within.

1. Shareholder Advocacy: Shareholder advocacy allows investors to actively engage with companies on corporate policies, influencing their ESG practices. This can include activities such as proxy voting, submitting shareholder resolutions, and communicating directly with company leadership. Shareholder advocacy is generally categorized into:
   
   
   
   1. Base Engagement: Base engagement involves basic proxy voting on major shareholder issues, with limited direct involvement in company operations. It allows investors to exercise some influence over companies without actively managing investments.
   
   
   2. Deep Engagement: Deep engagement goes a step further, involving consistent and ongoing interaction with companies to address specific ESG concerns. This might include regular communication with company leaders, as well as proposals and actions taken to improve corporate sustainability. Funds with deep engagement often have additional staffing and screening processes, resulting in slightly higher fees compared to standard funds.
   
   
   
   

It’s important to note that funds with deep engagement often require more resources for continuous interaction and monitoring, which may result in slightly higher fees compared to funds with base engagement or those that focus on passive ESG practices.

C.   Community Investing: Empowering Underserved Communities: Community investing allocates capital to underserved areas to support affordable housing, local businesses, and access to financial services. This type of investment is typically channeled through Community Development Financial Institutions (CDFIs), which aim to provide economic stability and foster growth in low-income or marginalized communities. By investing in CDFIs, investors can directly empower communities, supporting long-term economic development and social well-being.

2. Balancing Social Impact and Financial Returns: No Sacrifice Required

One of the biggest myths surrounding SRI is that it sacrifices financial return for social good. However, this is increasingly untrue. Many SRI strategies now offer competitive, if not superior, returns while aligning with social and environmental values.

The financial performance of SRI funds has improved significantly over the years as more companies integrate sustainability into their business models. Studies have shown that companies with strong ESG practices often outperform their counterparts in the long term due to better risk management, innovation, and customer loyalty. Thus, it’s not just possible but often beneficial to pursue financial returns while staying true to one’s values.

SRI funds typically use the same rigorous financial analysis as traditional funds, ensuring that the focus remains on generating competitive returns. At the same time, these funds assess the social and environmental impact of their investments, allowing investors to feel confident that their portfolios are aligned with their personal values without giving up financial growth.

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   Funds with Different Degrees of Engagement and Screening

   
   

Not all SRI funds are created equal, and they vary significantly in terms of how they screen companies and engage with corporate practices. Some funds apply strict screening criteria, avoiding investments in companies with negative environmental or social impacts, while others engage directly with companies to influence their practices. Below is a breakdown of how these funds differ:

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   Funds with Strict Screening Criteria

   
   

These funds focus on companies that meet specific ESG standards and exclude those involved in harmful industries. They screen investments based on a range of criteria, including environmental sustainability, labor practices, corporate governance, and product safety.

Example Funds:

• Green Century Equity Fund (GCEQX): This fund actively excludes companies involved in harmful industries, such as fossil fuels, tobacco, and weapons. It invests in companies with strong ESG practices and also engages in shareholder advocacy to push for better corporate sustainability.


• Nuveen ESG Emerging Markets Equity ETF (NUEM): NUEM screens for ESG criteria in emerging markets, excluding industries like fossil fuels and other controversial sectors. This fund is ideal for investors seeking global diversification with an ESG focus.


• CRBN ETF (iShares MSCI ACWI Low Carbon Target ETF): This fund invests in companies with low carbon emissions and tracks a global index. By focusing on companies with minimal carbon footprints, it allows investors to reduce their exposure to industries contributing to climate change.

• Trillium ESG Global Equity Fund: This fund focuses on environmental leadership and avoids investments in fossil fuels unless companies have credible transition plans. Trillium’s strategy combines deep engagement with its environmental focus to drive lasting change.

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   Funds with Flexible Screening and Shareholder Advocacy

   
   

These funds do not exclude entire industries but instead focus on engaging with companies, including those in potentially controversial sectors, to improve their ESG practices. This approach allows for a broader range of investment opportunities and the potential for greater influence over corporate behavior.

Example Funds:

• USSG ETF (Xtrackers MSCI USA ESG Leaders Equity ETF): This fund focuses on U.S. companies that score well on ESG metrics but does not exclude companies based on industry. It allows for greater diversity in investment while promoting positive ESG change through shareholder engagement.


• MIDE ETF (Xtrackers S&P MidCap 400 ESG ETF): MIDE targets mid-cap companies in the U.S. and focuses on those with strong ESG practices. It provides growth opportunities while still encouraging ESG engagement.

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   Funds with Low Screening and Engagement

   
   

Some funds may not apply much screening or focus heavily on engagement. These funds are more likely to invest in a wide range of companies, including those with weaker ESG practices, while still working to influence those p