Socially Responsible Investing for Self-Directed Investors: Your Guide to a Values-Aligned Portfolio
In our modern era, we are fortunate to have unparalleled access to a wealth of information. This abundance of knowledge has transformed how we handle our finances, prompting many of us to make more deliberate choices about spending our money in alignment with our values.
In light of our increasing awareness, it’s becoming more and more prevalent for consumers to voice their concerns and take a stand against businesses whose practices or values don’t resonate with their own.
In fact, we can all probably think of a few well-known businesses that have become targets of protests in recent years, with some even experiencing the impact of “cancel culture.” This change reflects an emerging pattern of conscious consumerism, as people are leveraging their buying power to champion businesses that share similar values to their own.
But these actions extend far beyond the confines of traditional shopping experiences; it’s now shaping how people make investment decisions. Consequently, socially responsible investing (SRI) has become increasingly popular in recent years. And as a self-directed investor, you have even more opportunities to participate in socially responsible investing.
Decoding Socially Responsible Investing: What Is It?
Socially responsible investing is a strategy that empowers investors to align their financial objectives with their values. It involves making investment decisions not solely based on potential financial returns but also considering environmental, social, and governance (ESG) factors.
What Are ESG Factors?
ESG factors are considered when assessing the sustainability and ethical impact of an investment. Here’s a breakdown of each component:
Environmental Factors
These focus on a company’s environmental impact, including its carbon footprint, energy efficiency, waste management, water usage, and efforts to reduce greenhouse gas emissions. Companies with strong environmental practices may prioritize renewable energy, sustainable sourcing, and environmentally friendly operations.
Social Factors
These pertain to a company’s treatment of its employees, labor practices, community engagement, diversity and inclusion policies, and overall impact on society. Strong social performance may involve fair wages, employee benefits, ethical supply chain practices, and community development initiatives.
Governance Factors
Governance aspects evaluate a company’s leadership, board structure, executive compensation and reporting transparency, and adherence to ethical and legal standards. Companies with solid governance practices tend to be more accountable, sustainable, and in a better position to navigate challenges and capitalize on opportunities.
Initiating the Journey of Socially Responsible Investing
If you’ve ever considered designing your investment portfolio to align with your values and beliefs—or perhaps this is your first introduction to socially responsible investing—then stay tuned to discover how you can transform your portfolio from solely profit-focused to one that embraces both purpose and profit. Considering the scale of this endeavor, let’s tackle it one step at a time:
Understand your values
Screen your investments
Diversify your portfolio
Be aware of greenwashing
By this point, are there any businesses that have come to your mind that you wouldn’t support for certain reasons? Even if you haven’t directly shopped with them, have you considered the possibility that you’re indirectly supporting them through your portfolio?
Whether you need to review and divest from certain companies or you’re just starting on your investment journey, we’ve got you covered in this ultimate guide to socially responsible investing.
1. Understand Your Values
Getting your investments in line with your values starts with understanding what truly matters to you. What causes are closest to your heart? This could encompass a range of topics, such as gender equality, human rights, clean energy, sustainable agriculture, and more.
As you’re putting together your list, take note of your hard no’s—things you absolutely don’t want to invest in. In socially responsible investing, investors often steer clear of companies or industries that are considered harmful to society, the environment, or human rights. These companies with negative social and environmental impacts are typically referred to as “sin stocks.”
Among the commonly cited “sin stocks,” you may find:
Tobacco companies
Firearms manufacturers
Fossil fuel companies
Alcohol producers
Gambling and casino businesses
Fast food chains
Genetically Modified Organism (GMO) Companies
Human rights violators
Animal testing companies
Unethical financial institutions
Companies with questionable labor practices
The classification of “sin stocks” is subjective and can vary from person to person based on their individual beliefs and values. Similarly, the causes that ignite your passion may not hold the same importance for others.
While these examples are meant to inspire your thinking, creating your list of “yes” and “no” factors is essential because your list is unique to you. Let your thoughts flow naturally as you start, and you can always add to the list as your understanding and preferences evolve over time.
2. Screen Your Investments
With your values clearly defined, it’s time to assess your portfolio to determine if you’re invested in any companies or industries that don’t align with those values. Your portfolio comprises all your accounts, including 401(k)s, IRAs, taxable investment accounts, and any other investment vehicles where you hold assets.
Depending on the size of your portfolio, reviewing each investment individually can be quite tedious and time-consuming if done manually. This is particularly true if you’re invested in exchange-traded funds (ETFs) or mutual funds, which essentially bundle together a larger number of stocks, ranging from dozens to even thousands.
Doing a thorough review of each investment “by hand” isn’t ideal or practical, which is why online screening tools and databases are available to help identify investments that meet your exclusion criteria. Some examples of screening tools used for this purpose are:
Morningstar ESG Screener: Morningstar, a renowned investment research company, offers an innovative screening tool that evaluates the ESG practices of companies. With this tool, you can effortlessly check the ESG rating of mutual funds and ETFs currently in your portfolio. Moreover, it serves as a valuable research tool, helping you search for funds that align with your preferences and values.
Invest Your Values: Invest Your Values provides a free online tool that evaluates the climate and social impact of a wide array of U.S. mutual funds, ETFs, and 401(k) plan offerings.
As you explore these screening tools or others, it’s important to understand their rating methodology and how data is collected and analyzed. Each tool may have its unique way of evaluating ESG factors, so do your research and opt for the tools that best align with your specific investment objectives.
If you discover investments in your portfolio that you’d like to eliminate or come across new investments you want to add—pause before selling and buying! Consulting with a financial professional is critical to fully grasp the potential impact of selling and buying specific positions.
For instance, selling all your positions in a taxable brokerage account at once can lead to significant tax consequences. A thoughtful and strategic approach is essential to adjusting your portfolio while mitigating tax implications effectively.
3. Diversify Your Portfolio
Like any other investment approach, diversification plays an important role in socially responsible investing. By spreading your investments across various sectors and asset classes, you can reduce risk and enhance potential returns.
Investing in causes that resonate with you and align with your values can indeed be rewarding, but finding a balance is essential. Placing too much emphasis on ESG criteria while excluding other viable options can potentially lead to underperformance compared to broader market benchmarks. Here are some reasons why excessive focus on ESG might impact portfolio growth:
Limited Investment Opportunities: Emphasizing strict ESG criteria may significantly narrow your investment universe. By excluding specific industries or companies, you could potentially miss out on growth opportunities that exist in other sectors.
Risk-Return Tradeoff: While companies with strong ESG practices may be admirable for their sustainable and ethical approach, they might not always be the top-performing companies in terms of financial returns. On the other hand, high-growth sectors or companies with strong financial performance may not always prioritize ESG criteria.
How can you avoid going too far in limiting your investment options? One way is to consider a more focused approach. Rather than outright excluding entire industries, pinpoint what companies are an absolute no for you. Striking this balance allows you to invest according to your values without compromising on potential returns.
4. Be Aware of Greenwashing
Companies and businesses are well aware that consumers are becoming increasingly intentional with their spending and investing. To capture the attention of mindful consumers, they invest significant sums of money into marketing efforts aimed at telling a compelling and captivating story.
They strategically use enticing words like “ethical,” “fair,” “organic,” “eco-friendly,” “sustainable,” and more, capitalizing on a consumer’s attraction to such terms. However disheartening, it’s important to acknowledge that some of these marketing tactics may not accurately reflect reality.
This is referred to as greenwashing, where companies or investment funds claim to be environmentally or socially responsible when they, in fact, are not. Greenwashing is aimed at misleading consumers and investors who genuinely want to support companies and businesses committed to sustainability and environmental responsibility. Not only is this practice unethical, but it can undermine genuine efforts.
To steer clear of greenwashing and make well-informed decisions as a prudent investor, here are some steps you can take:
Do thorough research, including third-party or independent reports that validate a company’s initiatives
Be cautious of vague or exaggerated environmental claims
Verify ESG data using one of the online screening tools above or others
Reach out to companies directly to inquire about their specific efforts and commitment to environmental responsibility
Unfortunately, as consumers and investors demand greater responsibility from businesses, there’s a growing trend of greenwashing. That’s why you must be aware of greenwashing tactics as you build an investment portfolio that aligns with your values and supports companies making authentic efforts. By remaining vigilant, you can make informed investment decisions that contribute to promoting sustainability and responsible business practices.
Exploring Options for Socially Responsible Investing
There are various investment vehicles and platforms where you can engage in socially responsible investing. In fact, you likely already have one or more accounts where you can begin your socially responsible investing journey, such as your:
Employer-sponsored retirement plan like a 401(k)
Traditional or Roth IRAs
Taxable investment accounts
It’s worth noting that employer-sponsored plans often come with limited investment options, providing less flexibility compared to personal accounts like the others mentioned.
While you’re probably already familiar with the commonly known investment accounts above, a self-directed IRA (SD-IRA) is another option worth exploring. Unlike traditional accounts that often limit your investment choices to stocks, bonds, mutual funds, and ETFs, an SD-IRA gives you greater control and flexibility.
With an SD-IRA, you can venture beyond the usual options and invest in a broader array of assets, such as real estate, private equity, crowdfunding projects, and more. With this approach, you have more flexibility to invest in companies, funds, or projects that are socially responsible, environmentally friendly, and ethically aligned. Incorporating an SD-IRA can open up new investment opportunities and offer an effective way to diversify your portfolio.
While SD-IRAs present creative investment and wealth-building opportunities, navigating the complexities and understanding the rules behind it can be less exciting, which is why we’re here—to do the heavy lifting for you.
How Chicago Trust Administration Services Can Help
If you’re eager to build an investment portfolio that reflects your values and beliefs, but the whole process feels overwhelming, you’re not alone. From clearly defining your values to screening your existing investments and seeking new opportunities—all while avoiding deceptive marketing tactics—choosing socially responsible investments can feel like a lot to handle.
You don’t have to go through this journey alone. As you opt to include socially responsible investments in your SD-IRA, we can help guide you along the path to including those assets in your portfolio. Your values matter to us, and we’re committed to helping you achieve your values-based investment goals with confidence and clarity.
At Chicago Trust Administration Services, we have a track record of helping our clients explore the exciting possibilities of investing in an SD-IRA, and we’d love to help you as well! To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.