Socially Responsible Investing

Socially responsible investing refers to choosing investments that combine social factors, corporate actions that reflect such social views, and good investment returns. This type of investing seeks to achieve competitive annualized returns, while making the world a better place or at least assisting to sustain what is left of it.

Investors with a social criteria to their investment philosophy concentrate on several areas such as corporate governance, environmental stewardship, human rights, local community involvement, consumer protection, etc. Generally, products that affect the world negatively are avoided by such investors and as such, companies dealing with tobacco, alcohol, weapons, and gambling are excluded at the screening stage.

Socially Responsible Mutual Funds

The market for socially responsible investors is a booming one and mutual funds dealing with socially responsible companies have grown considerably over the last few years (pdf). Such funds only hold shares of companies that meet certain social, environmental, and moral beliefs as set out in the prospectus and may look out for corporate records that go beyond satisfying required legislations.

Many funds also engage in community investing, which provides capital to community-based organizations. Such organizations offer loans to individual and corporate borrowers, both domestically and internationally. These loans are similar to any other loan made by an institution but the main variant is the selection of the borrower.

In simpler terms, someone seeking a loan to buy a luxury car or a company wanting to start a business manufacturing spare parts for such luxury cars may never be approved, whereas loans for lower income group housing or educational development, both locally and overseas, may get the nod.

Social Investment Organizations

The Forum for Sustainable and Responsible Investment (US SIF) in the US and the Social Investment Organization (SIO) in Canada are national membership associations that include financial institutions, investment firms, and other organizations. They promote socially responsible investing by incorporating governance and environmental criteria into the selection process, while seeking to achieve competitive returns and bring about positive change. There are different indices available that offer ratings and analysis of social, environmental, and governance-related business practices of companies all over the world.

Performance of Socially Responsible Funds

It is well-documented that mutual funds have high fees, especially in Canada. So, ethically responsible funds come with similar or higher fees. The higher fees can be attributed to the additional research activities required to screen and select suitable companies meeting the strict guidelines. Also, the smaller assets under management prevent such funds from harnessing the economies of scale typically available to bigger investment firms.

The returns achieved by socially responsible US funds can be found on this fund performance page and Canadian fund performances are available on this spreadsheet.

For the Investor

As always, due diligence is required before getting one’s feet wet in this type of investing. As noble as the motto of such funds, it is important for the investor to know the fundamental guiding principles of the fund, fees involved, industries covered (to check for diversification), returns achieved in the past, special tax considerations if any, etc. The Social Funds website maintains a vast database for socially responsible investors and would be a good starting point for interested readers.

With socially responsible mutual funds aplenty, ETFs have not lagged. The iShares Jantzi Social Index Fund, iShares KLD 400 Social Index Fund, and PowerShares WilderHill Clean Energy Portfolio are some players in the ETF market. If you are looking for faith-based ETFs, you will find a few on this page.

Are you a socially responsible investor? If so, how do you invest (individual stocks, mutual funds, or ETFs)? Are you content to overlook governance and social issues for superior returns?

About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.  You can read his other articles here.

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Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.
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9 years ago

When people don’t have a lot of money they will spend what little they do have on things which give them short-term enjoyment within long-term misery.

Why do you think Hollywood has never suffered in bad economic times?
Escapism. ;)

9 years ago

Nah thanks. I am already invested in VISEX. A combination of alcohol, tobacco, gaming, and defense industries will do better during this prolonged recession compared to this tree hugging alternative…

9 years ago

I always wonder if it is better to invest in companies that are socially responsible or to pressure companies that you invest in to make more of an effort.