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Socially Responsible Investing - A Guide

When it comes to investing, we’re all too often prompted to put our ethics aside when it comes time to make profitable decisions. Whether it’s investing in “sin industries” like tobacco and alcohol, or betting on big trends like increased defense spending during times of war, it’s no easy chore to balance doing what might be best for your portfolio with what actually coincides with your morals.

Making money with a clear conscience might sound far-fetched to anyone who’s played on Wall Street long enough, but the reality is that there are dozens of portfolio managers out there working to achieve exactly such a balance. Socially responsible investing has been gaining traction over the years as more and more investors and money managers have embraced the notion of seeking out lucrative returns while also considering the company’s impact on society and local communities [see also Companies That Don’t Do What You Think They Do].

What Is Socially Responsible Investing?

Socially responsible investing refers to the notion of favoring companies that promote social good through their corporate practices (socially responsible companies), while steering away from those that partake in offending actions. Furthermore, socially responsible investors incorporate ESG analysis into their decision making; this refers to the consideration of environmental, social, and governance factors when evaluating the long-term prospects of a company as well its long-term impact.

In practice, socially responsible investing is not so clear-cut, as much of the security selection process is ultimately dependent upon the portfolio manager, which inevitably introduces some sort of bias and raises questions about what exactly constitutes a socially responsible company.

In one instance, a socially responsible investor may undertake an approach that focuses only on “green” stocks – companies that are in the business of promoting sustainability. On the other hand, socially responsible investing can also refer to an approach that takes a broad group of stocks and simply screens out the “negative” ones; this method may screen out companies operating in the tobacco, alcohol, and gambling industries.

Socially Responsible Dividend-Payers

Rather than reinvent the wheel and come up with our twist on what qualifies a company to be deemed a “socially responsible investment,” we’re taking a deeper dive into an existing benchmark that does just that: meet the MSCI USA ESG Select Index. This benchmark powers the iShares ETF (KLD), which is designed to measure the equity performance of companies that have positive environmental, social, and governance characteristics relative to their industry and sector peers, and in relation to the broader market [see also The Ten Commandments of Dividend Investing].

Below, we have dissected this benchmark of 100+ stocks further, featuring only dividend-paying, socially responsible stocks that have also managed to consistently grow their distribution for at least the past 10 years:

The Bottom Line

Socially responsible investing is a growing trend that aims to focus on capturing lucrative financial returns while at the same time considering the environmental and societal impacts associated with a given company. There is a lot of debate about what constitutes a socially responsible company and what doesn’t. What’s certain, however, is that socially responsible investing is appealing because it looks to strike a better balance between making money and supporting businesses that promote social good.

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