What you need to know about socially responsible investing

In recent years, socially responsible investing, or ethical investing, has quickly gained momentum.

Also coined as impact investing and sustainable investing, socially responsible investing considers the environmental impact, social implications, and corporate governance to select where and how to invest while having a positive societal impact.

"More recently, you've had very sharp uptick," Peters said. From the beginning of 2012 to 2014, SRI assets in the U.S. grew 76 percent, to $6.57 trillion, up from $3.74 trillion. – CNBC

Socially responsible investing is estimated to represent $7 trillion in the U.S. and $21 trillion globally. This represents roughly 18% of the total assets under management in the United States, according to US SIF.

It is a very broad asset class given that it can represent any sectors or market cap. The funds currently offered range anywhere from environmental-friendliness to diversity to religious considerations.

The Barclays Women in Leadership ETN (WIL) for example, focuses on U.S. firms with women as CEOs or board members while the SPDR MSCI ACWI Low Carbon Target ETF (LOWC) focuses on stocks of environmentally friendly firms.

In terms of allocation, it is pretty much impossible to determine the assets of socially responsible funds unless you go through them one by one. If we look at the Low Carbon Target ETF (LOWC), for example, it highly resembles the Total Market ETF (VTI) and includes companies that are not necessarily socially responsible but that have a low environmental impact.

Top 25 Holdings of LOWC
Apple Inc
Microsoft Corp
Johnson & Johnson
Amazon.com Inc
JPMorgan Chase & Co
Facebook Inc A
Wells Fargo & Co
General Electric Co
AT&T Inc
Alphabet Inc C
Alphabet Inc
Bank of America Corporation
Nestle SA
Procter & Gamble Co
Pfizer Inc
Verizon Communications Inc
Philip Morris International Inc
Coca-Cola Co
Comcast Corp Class A
Samsung Electronics Co Ltd
The Home Depot Inc
Merck & Co Inc
Citigroup Inc
Cisco Systems Inc
Walt Disney Co

Top 25 Holdings of VTI
Apple Inc
Microsoft Corp
Amazon.com Inc
Exxon Mobil Corp
Johnson & Johnson
JPMorgan Chase & Co
Berkshire Hathaway Inc B
Facebook Inc A
General Electric Co
Wells Fargo & Co
AAT&T Inc
Alphabet Inc A
Bank of America Corporation
Procter & Gamble Co
Alphabet Inc C
Chevron Corp
Pfizer Inc
Verizon Communications Inc
Merck & Co Inc
Comcast Corp Class A
The Home Depot Inc
Intel Corp
Cisco Systems Inc
Citigroup Inc
Philip Morris International Inc

As shown above, the composition of the greener fund in comparison to the total market fund is shockingly similar. All tech, financials, and pharmaceutical companies remained. The definition of an eco-friendly company is still a gray area and I would personally not qualify Nestlé or Coca-Cola as green given that they highly contribute to the 50 billion plastic water bottles Americans used last year. In addition, the current Chairman and former CEO of Nestlé even deny that water is a fundamental human right!

How to invest in socially responsible companies

On one hand, Walmart is a green company because it installs solar panels on its stores and recycles more than 81% of the materials used by their stores. However, it pays its workers unlivable wages and recently announced it would lay off over 16,000 workers.

Even Apple is considered a low carbon emission company even if it highly contributes to the 20 million tons of electronic waste produced every year. Not to mention the dozens of workers who committed suicide after intolerable working conditions.

If you want to only invest in socially responsible companies, you will have a hard time finding proper diversification. The Vanguard FTSE Social Index Fund (VFTSX) for example, has similar holdings but does exclude companies like the cigarette giant Philip Morris that is present in the Low Carbon Target ETF.

Being completely socially responsible is a hard thing to accomplish but on the other hand, can you have a significant impact?

Let us assume you would have $10 Million dollars to invest...

If you would directly invest in a high-pollutant such as Exxon Mobil, you would only own 0.00295% of this empire. With a total valuation of $339.02 Billion dollars, it is extremely hard to gain any important position where you could make a difference.

If you were to invest in the Vanguard Total Stock Market ETF (VTI) instead, you would own 0.00185% of this fund given its $541.30B assets under management. Out of that, only 1.35% of the fund is invested in Exxon Mobil. In the end, out of your $10 Million dollars, your total holdings in Exxon Mobil would actually be $135,000 or 0.000398% of the total value of Exxon. Your total contribution to this destructive company is inconsiderable.

If you wanted to invest directly in a green company or sector ETF and simply bought the Guggenheim Solar ETF (TAN), for example, you would have an impact but this may come at the cost of great returns. Holding only 23 companies with a median market cap of $1.1 billion, this fund offers very limited diversification compared to the 3578 companies included in the Vanguard Total Stock Market ETF (VTI). The trailing 5-year return for this solar fund was of -4.82% compared to 14.64% for the total market. The total return over the last 5 years was of -26.5% for TAN compared to 87.8% for VTI. Unfortunately, no data was available for longer periods of time but the volatility shows just how shaky this investment has been.

Is solar a good investment

I am not saying we cannot have any impact on the market but all this fun exercise was with $10,000,000 which is more than most of us will never have to invest. Even with this amount, this still had a minuscule impact on a single stock.

Be a good person

I think that the lesser of two evils is to invest in a total market fund to maximize your diversification and long-term returns while minimizing your implication in any given investment that would not qualify as socially responsible.

While investing in a properly-diversified fund such as Vanguard Total Stock Market ETF (VTI), you are putting all your chances on your side to maximize your returns over time and accelerate your wealth accumulation. Once you have enough to retire early, for example, then you can volunteer your time to the ones in need in your area and really make a difference. You could also donate to causes that matter to you and make an impact on that front.

Be good to the ones around you and make a difference with the actions you take every single day. The smile on your face can make someone's day.

Xyz.

The post Socially Responsible Investing appeared first on Our Financial Path.

RELATED: 5 foolish mistakes investors make everyday

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5 foolish mistakes investors make everyday
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5 foolish mistakes investors make everyday
#1. Chasing performance
"Investing in the stock market is a numbers game. You want to see a return otherwise you're treading water at best. Countless times I would hear investors say, "I've only seen X% return in the past quarter!" and want to jump ship. This short-term thinking often gets you nowhere and brings added commission costs." -InvestmentZen
#2. Thinking you can beat the market
"The twin sibling of chasing performance is believing you can time the market. In many cases, market timing results in investors selling low and buying high – the opposite of what we should be trying to accomplish. As the Peter Lynch quote goes, "There are no market timers in the 'Forbes 400,'" yet the appeal draws many investors who think they can time the market." -InvestmentZen
#3. Listening to the media
"The media may be fodder for a good laugh, but in most cases, they're simply that when it comes to investing. "By far the biggest mistake I see today is letting the media dictate how you invest. While the media is loud and comes from every direction today, they simply don't know what's in your best interests," says Clint Haynes, CMFC® of NextGen Wealth." -InvestmentZen
#5. Ignoring your investments 
"Ignorance can cost investors thousands of dollars in wasted money. Whether it be a corporate action or price plummet, if you never check on your investments, you can lose big." -InvestmentZen
#4. Not being properly diversified
"Proper diversification is a hallmark of sound investing. Sadly, too many think picking a small handful of stocks means they're diversified, without realizing that they're opening themselves up to significant risk.

On the flip side, many investors think that because they invest in mutual funds or Exchange-Traded Funds (ETFs), they're diversified. Little do they realize that if they don't look at what those funds hold, they could own a group of holdings that leaves them more open to risk than they realize." -InvestmentZen

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