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Definition of Socially Responsible Investing

SRI. ESG. Impact Investing.

What do these terms mean? And what do they mean for my investment portfolio? These are questions we sometimes hear from clients.

SRI is an acronym for Socially Responsible Investing (or, sometimes, Sustainable and Responsible Investing). SRI is often described using other terms like ESG (Environmental, Social and Governance) Investing; Ethical Investing; Mission-based Investing; Green Investing; and, more recently, Impact Investing.

According to USSIF (The Forum for Sustainable and Responsible Investment), a foundation focused on Socially Responsible Investing in the United States, the basic description of SRI is:

“Consideration of environmental, social and corporate governance (ESG) criteria in addition to standard financial analysis.”

In essence, SRI is about choice – the choice of an investor to invest, or not invest, in a company that is aligned with, or against, their social values.

Evolution of Socially Responsible Investing

SRI is not a new concept but has actually been around for decades. This investing style started with an “exclusionary” approach where investors excluded companies, or entire industry sectors, that conflicted with their values. For example, many SRI investors avoid investing in areas such as firearms, alcohol, tobacco, gambling, nuclear power, pornography or military weapons. This strategy has been, and continues to be, one of the more prominent strategies employed by investment managers on behalf of their clients.

Over the past decade, SRI investing has evolved into a more “inclusionary” ESG investing approach of integrating the analysis of environmental, social and governance issues into the traditional analysis of company investments.

Investors, and investment firms, may emphasize different ESG factors with some focused on environmental issues, such as climate change or efficient use of natural resources. Others might pay more attention to social issues, such as product safety, workplace practices or community impact; still other investors might care most about governance issues, such as corporate transparency or board and executive diversity.

Investment managers have increasingly come to believe that companies paying close attention to these ESG factors are stronger businesses that will provide long-term benefits for shareholders.

Most recently, Impact Investing has been growing in popularity with investors attempting to address a specific social or environmental issue by employing a targeted approach. This is typically done through private markets like private equity, hedge funds and pooled portfolios not always open to all investors.

Financial Growth of SRI Strategies

USSIF’s 2016 survey shows that US-based assets under management using SRI strategies jumped 33% in two years to $8.7 Trillion, over 20% of total professionally managed assets in the country. While over 60% of these assets are owned by institutional investors, such as pension funds, endowments and foundations, SRI investing is increasingly popular with individuals.

Investment funds incorporating ESG approaches now number over 1,000 (a big jump from the 55 seen back in 1995). Even though half of these are private investment vehicles, as of 2016 there were 519 registered investment companies, mostly mutual funds and exchange-traded funds (ETFs), accounting for $1.7 Trillion in ESG assets. Clearly, this investing style is no flash-in-the-pan and should continue to exhibit this type of growth in the future.

Myths About Socially Responsible Investing

Despite increasing popularity, some myths persist with regard to Socially Responsible Investing. One of these is lack of available investment products. As seen in the last section on financial growth of SRI strategies, this notion is completely untrue. It made more sense to think this way back in 1995, when there were only 55 ESG investment funds, but we now have over 500 publicly available investment funds to choose from that incorporate ESG factors in their investment decisions.

Another myth is that investors have to accept a lower investment return if they want to build a portfolio that follows socially responsible investing ideas. Again, this might have been true in the past when we had few SRI vehicles to invest in but more recent studies have shown that there is no long-term performance cost to SRI. Many investment managers feel that companies scoring high on ESG criteria will prove to be better businesses that provide strong shareholder returns.

Of course, all investing involves risk and there is no guarantee that SRI investment funds will perform better than non-SRI funds. The point is one cannot automatically assume there will be lower portfolio returns from following a socially responsible approach.

A third myth is that investors just aren’t that interested in ESG investing. The rapid growth of assets invested using these factors shows that this idea makes no sense. In fact, a recent survey by the Morgan Stanley Institute for Sustainable Investing found that 71% of all investors wanted to know more about this idea. The percentages were even higher for women (76%) and millennials (84% of whom said they liked this investment approach).

Our Approach

As always, our approach to investing starts by working closely with you to identify your goals and interests; what is important to you. Walnut Creek Wealth Management has done extensive, long-term research to find experienced, quality SRI investment managers and we have been managing SRI portfolios for many clients for a number of years.

We build portfolios that include mutual funds and ETFs from a variety of investment firms utilizing different approaches to the ESG concept. Some funds may follow a more traditional SRI approach; others focus on environmental issues, while still others specialize in governance matters to make sure the companies they invest in are good corporate citizens.

In all cases, we strive to build investment portfolios that match your risk profile and are well diversified by asset type and geographic region in the same manner we build non-SRI portfolios.


If you are interested in learning more about Socially Responsible Investing, or incorporating these ideas in your investment portfolio, please speak with your Walnut Creek Wealth Management Financial Advisor.

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