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Socially Responsible Investing: What Do You Consider Off Limits?

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Do you participate in socially responsible investing, or do you invest in a large bucket of funds?

Many of us know that we need to be investing in some form or fashion to grow our wealth. While there are a variety of ways to do that, investing in the stock market is the most common.

One of the first things you’ll realize as you start investing in the stock market is that some of the companies you’re considering do not hold to your beliefs or compromise your moral standards by what they promote or how they run their business. Socially responsible investing (SRI) is a term used to describe the process of investing in companies whose ethics align with your own.

In my former day job investors regularly asked me how to find and invest in socially responsible funds. Many of them were upset when they found out they had been intending to avoid a particular company or industry only to find out they were not. With that in mind, if socially conscious investing is something you care about, then today’s post for you.

What is Socially Responsible Investing?

 

Socially responsible investing involves investing in companies that hold to the same beliefs you do and avoiding those that don’t. For many investors this means avoiding “sin stocks” like:

  • Tobacco
  • Alcohol
  • Pornography
  • Guns

Not necessarily considered sin stocks, but still important to avoid for many are:

  • Companies that harm the environment
  • For-profit prisons
  • Firms that squelch religious freedoms

The above lists aren’t meant to be exhaustive in nature and are just meant to give a brief example of the types of companies some may want to avoid supporting.

Thinking as a consumer, this makes sense as you want to vote with your wallet when it comes to being in the stock market. I know personally speaking that if I agree with something I’m going to do all I can to promote it or if something is against my conscious then I’m certainly not going to give money to a company that promotes it.

If you think you’re alone as an ethical investor, think again. According to Forbes, $1 out of every $9 under professional money management falls into the socially responsible investing category. I would venture to guess that these numbers will only increase in the future which makes it even more important to know how to find those companies and funds that align with your beliefs.

Socially Responsible Investing Requires Work

 

Work is really where the rubber meets the road when it comes to socially responsible investing. Here’s why: many mutual funds and ETFs hold a wide variety of stocks in hundreds of companies. If you don’t dig down into the holdings of a fund then you’re inevitably going to leave yourself open to investing in a company you ardently disagree with. That poses a problem.

Added to that, many companies today are large conglomerates and thus makes it even more difficult to determine where you should stand with relation to investing in them or not.

Take Disney for example. While I’m no fan of Disney (Frozen anyone?) I am a stockholder. But, others would disagree with me. Take a look at the some of the different companies Disney either owns or has a partial stake in:

  • ABC TV
  • ESPN
  • Hulu
  • A & E Network
  • Marvel Studios
  • Lucasfilm
  • Pixar
  • Touchstone Pictures

That list only scratches the surface and of course doesn’t include all of the different Disney specific branded lines like the theme parks, cruise line, music studio, etc. The point is, they have their fingers in a lot of pies. If you don’t have a problem with Disney but do with one of their subsidiaries then it poses the question of if you personally can or should invest in them.

Granted, you may not have a “problem” with Disney but I guarantee you there are many other companies out there that on the surface would appear not to conflict with your ethics but in actuality do.

 

Don’t Make Investing Decisions Based on a Fund’s Name

 

You also need to be aware that when it comes to socially responsible investing to not just go off the name of a given fund to think it’s one that’ll fit what you’re looking for. In fact, the name should be secondary (at best) to the holdings within the fund.

Assuming ethical investing is something that’s important to you don’t take the work as something to hold you back. It is possible to find socially responsible mutual funds, you just have to do the work to find them. I would also argue that if it’s important to you that the time spent will be well worth it. That said, I’m going to show you the two main ways I look for a mutual fund or ETF and how to find what companies they hold.

Use These Tools to Find Out What’s in a Fund

 

The first option, and usually my go-to is Morningstar. Once at Morningstar you’ll want to follow the steps below to get to the holdings which is also shown in the graph below:

  • Type in the fund symbol to get to its home page
  • Click on the “Portfolio” tab near the far right
  • Then click on the “Holdings” tab

This will show you the top 25 holdings of the fund for free. Morningstar does offer a premium subscription service that allows you to see the top 100 holdings. Below is what you’d find for the Vanguard Health Care Fund:

 

socially responsible investing

 

If Morningstar ‘s free search leaves you wanting more then go directly to the fund family site – which is Vanguard in this case. Go to the Vanguard site. Look up your fund; for example, the VHT or the Vanguard Healthcare Index Fund. Follow these steps to find out what’s in the fund:

  • Type the fund’s symbol (in this case “VHT”) in the “Get a Quote” box in the upper right hand corner of the homepage
  • Click on the “Portfolio & Management” tab from the home page of the fund
  • Scroll about 2/3 of the way down the page and click on “Portfolio Holdings”
  • View the entire holdings of the fund.

 

socially responsible investing

 

I realize that some might not use Vanguard and want more than what Morningstar provides. There are other options beyond those. Depending on the online brokerage you use they should have screener tools to help weed out particular funds or stocks. This is part of the reason why I love using Motif Investing so much as they have a pre-made motif specifically for those interested in socially responsible investing, not to mention the ability to create your own fund.

I know this might seem like a lot of work – and it very much is. It can be if you’re looking at bigger funds, but the last thing you want is to be ignorant about what you’re investing in and violate your conscience.

One final example with regards to work…it can be easy to lose respect, on one level, for someone because they’re investing in a stock like Phillip Morris. Many hate Phillip Morris as they sell cigarettes. I get the feeling, though they’re a solidly run company in the eyes of many. However, what many don’t realize is a stock like Phillip Morris is a mainstay for many mutual/index funds. The result is you may be investing in them without realizing it.

If you think that might be the case for you, then I suggest you take a look at the holdings your funds have to make sure they line up with your beliefs. Assuming your 401(k) is your only investment vehicle, then take a look at what your provider offers. If they don’t offer funds you like then tell your Group Benefits area you want them to add a few. It’s their job to care for your needs and this certainly falls within that realm.

Do you only invest in things that don't go against your beliefs? Make sure you check your portfolio to ensure you're a socially responsible investor.

Vote With Your Money, But Realize it’s Largely Personal

 

As I touched on earlier, socially responsible investing calls us to vote with our money. Yes, it does require work to find firms that line up with your beliefs but that work is well worth it if you feel strongly about a certain topic. Taken further, it is the job of Fund Managers, to a certain extent, to bring more investors into the fund – don’t make their job easy by just handing over your money without doing your due diligence.

Socially responsible investing is like shopping. If I feel strongly about a certain store and want to stay as far as I can away from it then I’m not going to go in and give them my money. Investing should be no different.

We also need to realize that we all have different beliefs. It’s part of what makes America unique. Some aren’t going to be bothered by investing in a certain company or stock – they’re solely looking for solidly run firms that offer a good potential for return. Given that, it can be easy to judge others because they invest in stocks you won’t.

I get that feeling, but I challenge you to look at your own holdings to make sure you’re not investing in the same company. Your money and investment choices matter; by taking the time to invest in a socially responsible way you’ll likely be much happier with your portfolio.

 

What’s your take on socially responsible investing? Do you fully research what a fund holds before you invest in it? Have you ever sold out of a holding because you found out it was investing in a particular stock you didn’t want to be in?

 

 

 

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. I'm also a freelance writer, and regularly contribute to GoBankingRates, Investopedia, Lending Tree and more. If you're wanting to learn how to monetize your blog, check out my blog coaching services to see how I can help you take your site to the next level.

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37 Comments

  • Research on fields or nature of companies our money goes to is really important. I myself wouldn’t want to invest my money in alcohol or liquor-related companies, though it can give results. That being said, I’d rather do socially responsible investing.

  • I’ll be honest – Unless the company is a direct seller of a product I don’t agree with, I really don’t look too deeply into what I invest in as social responsibility is concerned.

    • John Schmoll says:

      I’m pretty much the same way MMD. Many companies are so big these days that it just takes too much time to do it. I’m generally just looking for a company that is performing well and providing a solid return.

  • We are indexers so we haven’t paid much attention to whether or not we are investing in companies I agree with on a moral level. It sounds nice in theory but there are only so many hours in the day.

  • Most of my investments are in funds soI know there are some companies in the mix I would prefer not to support, but in that context it’s tricky. My individual stock picks however, and my day to day shopping behavior, is entirely in support of companies I believe in socially, morally, etc.

  • Kalie says:

    Until recently, I didn’t think about how intertwined the big companies are with so many other companies and how that affects values-based investing. We have an index fund through an employer and don’t have much choice in the matter. I don’t want our money supporting certain things we object to, but feel somewhat powerless at this point. I guess my antidote at this point is to actively do some good by donating to social causes we support. I realize this isn’t investing but it’s a different way to be socially responsible with money.

    • John Schmoll says:

      That is a good way to try and balance it out Kalie. That said, many larger companies are so intertwined today, are do things you might not think of that it does make it relatively difficult.

  • I think investing in socially responsible funds is really hard. Sure their mission and what you see from them shows they are socially responsible, but you don’t know if they have a factory in China or what every ingredient/material they use and where they source it all from. It is almost to the point where you would have to do a ton of personal research and not rely on others to be certain a company truly is socially responsible.

    • John Schmoll says:

      You’re exactly right Jon. I think that’s something many overlook – the time it takes and that it’s virtually impossible to know everything they’re doing and if it lines up with your beliefs.

  • I would never argue with someone who was investing this way. If they felt a strong conviction to avoid “sin stocks” or companies that don’t support their value structure then they should by all means proceed.

    I don’t necessarily view my investment dollars as supporting what a company stands for. Nor do I view my vacations to Disney as an endorsement of all their political or social views. To me investments are simply about growing wealth and our trips simply about entertainment for my family. Were I to dissect every nuance of every company I’d probably never invest or go on vacation.

    • John Schmoll says:

      I would agree Brian – if someone feels a certain way about that then I’m not going to argue with them about it.

      I’m pretty much the same way. I look for a solid company and look at the numbers. Otherwise, you’d be extremely limited in what to invest in – much like your vacation analogy.

  • JC says:

    I personally just avoid the issue altogether because there’s just way too many issues to deal with and I imagine there’s a select few companies that I wouldn’t have an issue with on any level. If you are against alcohol then you need to avoid most restaurants as well. If you are against “harming the environment”, well say goodbye to just about every single company if they aren’t completely paperless. Of course there’s also the issue of them using a bunch of computers/smart phones that require the land to be mined. What if a company doesn’t use green energy? Would that knock them off the list? I don’t understand where you draw the line as to what’s allowed and what isn’t from a company. To each their own and I wouldn’t say anyone shouldn’t try to invest along with their own moral/ethical beliefs. I think there’s just too many contradictions when you start trying to invest on moral/ethical grounds and you’ll have to make exceptions to actually invest. Of course, then by making the exceptions do your investments still align with your moral/ethical standards? For me I just try to find companies that will continue to make money and then use my time and money to support causes that I feel are important.

    • JC says:

      Also, one more thing to keep in mind. You’re not supporting a company unless you are directly purchasing shares through an IPO or secondary offering or during debt issuance. The company is not the benefactor of the proceeds from your stock purchase if it’s made on the open market.

      • John Schmoll says:

        “If you are against alcohol then you need to avoid most restaurants as well.” I could not agree more JC, and this is something many don’t realize or think of when they’re looking at something like SRI.

        Thanks as well for the point on not giving money directly to a company. I would explain that to investors and they couldn’t make the separation. At the end of the day, unless there is something you’re completely against then I’d argue for looking for the best value and a company that’s going to make you money as the best general approach to take.

  • Personally, I think it can be tough to be socially responsible while investing, simply b/c SO many companies are doing things behind the scenes that can coincide with a person’s beliefs, via what they support and put money towards, etc. We work to do our best to invest in a socially responsible way, but we don’t stay up nights worrying about it.

  • Hmmm this is something I haven’t thought much about. As someone who only recently has had money to invest in the stock market (i.e. within the past 5 years) I’ve been more focused on just accumulating money and getting it into some sort of fund versus the deeper analysis that socially responsible investors take. I think there is something to be said about socially responsible investing and I highly respect those who take that approach. After all, if you are morally opposed to a certain type of company (gambling, for example), it would be silly to have an ownership stake in a company that makes money off of gambling. It does take work to be a socially responsible investor but I would say it’s worth the effort.

    • John Schmoll says:

      I’d say you’re taking the right, well my opinion at least, approach on focusing on the wealth accumulation aspect. That said, it can be worth it if you believe strongly about a certain issue though it can take a ton of work.

  • You have provided some wonderful resources that people can use to do their own research here, John. They can screen for whatever it is that is important to them – create their own ethical screens.

    As you point out, however, so many companies are so intertwined that is akin to the Six Degrees of Kevin Bacon phenomenon. It is up to investors to decide to what degree they are comfortable.

  • Elroy says:

    I won’t directly invest in companies I disagree with. If I were to totally abstain, there is no way I would ever buy VTSAX. So, it’s more an individual security and not investing in companies locally.

  • Ben Luthi says:

    I do most of my investing in index funds, so it would take far too much work to get my hands dirty with it. But I’m sure I’ll try my hand at investing in individual stocks at some point down the road, at which point this will be very important to me.

  • Early on when I was way more liberal than I am now, I did put my retirement contributions in a social index fund, but it was a big stinker. I try to just do broad index funds now and I have some money in the total stock market index, so I guess I own a bit of everything.

    I once heard a pastor talking about taking money from areas you didn’t really support. I believe it was in relation to lottery scholarships, which this church considered gambling, thus sinful. His take was to use their money to educate yourself then make a change against things you don’t support or something like that. It sort of resonated with me. Big corporations will give their money to someone, so it might as well be me and you. We can then choose how to leave our footprint on the world.

  • I tend not to invest in sin stocks. Mostly because I don’t think the business model has long term potential. Tobacco is a good example. There are some so called sin stocks that I have no problem investing in, alcohol is an example. This I still see as a long term business (although tastes could change in the future)

    • John Schmoll says:

      You do have a point Thomas, though I would argue that in many cases most companies are going to be diversified enough that they’ll likely stick around long term.

  • I don’t personally trade based on social responsibility; however, I have clients who do, and I understand where they are coming from to a degree. One client didn’t want to invest in the biotech company Regeneron because they used mice for testing. I understood her concern for the mice; however, this company has saved thousands of human lives as a result of the mice, not to mention it’s been one of the best performing stocks over the last few years as a result. I would pick humans and returns over mice all day long, but that’s just me.

    • John Schmoll says:

      That’s an excellent point Shannon and one that can get lost in many occasions. I understand the desire certain industries/companies but it can be far too much work and overlooking those that do very well.

  • I would place my time and effort to avoid patronizing them, and not buying the individual stocks I don’t agree with morally. IF PH is in a mutual fund I own, it is out of my control, and I probably will not sell it. Furthermore I would prefer not to look into the holdings, as not knowing is better for my sanity. For me, I will stay clear of cigarette stocks forever as a big no no. I’m sure I can find hundreds of other companies with a similar yield and return.

  • I’ve never thought about looking more closely to see which companies I’m invested in and if they line up with my beliefs. To be honest, my investments are mostly on auto-pilot as right now I only invest in my 401K and there are limited options to choose from.

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