Socially responsible investing (SRI) is an investment strategy that considers both financial returns and ethical, social, or environmental goals. SRI practitioners often focus on issues related to environmental, social, and governance (ESG) topics. Impact investing is a type of SRI that actively aims to create positive social or environmental changes through investments. Eco-investing, also called green investing, is a form of SRI that specifically focuses on environmental goals.

Socially responsible investors support companies that promote environmental care, protect consumers, respect human rights, and value diversity in race and gender. Some investors avoid businesses linked to harmful activities, such as alcohol, tobacco, fast food, gambling, pornography, weapons, fossil fuels, or the military. SRI is one of several methods that influence how asset managers choose investments. Sometimes, the term "socially responsible investing" refers only to avoiding harm by checking companies for ESG risks before investing. However, it can also include actions like impact investing, encouraging companies to improve through shareholder advocacy, and investing in local communities. Investor Amy Domini says that supporting communities and advocating for better company practices are important parts of SRI, while only avoiding harmful companies is not enough.

Measuring social, environmental, and ethical issues is difficult and depends on the situation. Some companies create ESG risk ratings to help asset managers evaluate investments. These companies assess businesses and projects based on risk factors and give each a total score.

History

Socially responsible investing (SRI) began with the Religious Society of Friends, also known as Quakers. In 1758, the Quaker Philadelphia Yearly Meeting stopped members from taking part in the slave trade—buying and selling humans.

One of the earliest supporters of SRI was John Wesley, a founder of Methodism. In his sermon "The Use of Money," Wesley explained his ideas about social investing: avoiding harm to neighbors through business practices and staying away from industries like tanning and chemical production, which can hurt workers' health. Many early examples of SRI were inspired by religious beliefs. Investors avoided companies linked to "sinful" products such as firearms, alcohol, and tobacco.

The modern era of SRI started in the 1960s, a time of major social and political changes. Investors focused on issues like equal rights for women, civil rights, and fair labor conditions. Martin Luther King helped shape early SRI efforts through actions like the Montgomery bus boycott and the Operation Breadbasket Project in Chicago. He used dialogue, boycotts, and direct action to pressure companies. Concerns about the Vietnam War also influenced SRI. A famous photo from 1972 showed a young girl, Phan Thị Kim Phúc, running after a photographer with burns from napalm. This image angered people and led to protests against Dow Chemical, the company that made napalm.

During the 1950s and 1960s, trade unions used money from multi-employer pension funds for investments. For example, the United Mine Workers fund supported medical facilities, and the International Ladies' Garment Workers' Union (ILGWU) and International Brotherhood of Electrical Workers (IBEW) helped build housing projects. Unions also used pension funds to push companies to improve working conditions through shareholder activism. In 1978, a book titled The North Will Rise Again and efforts by authors Jeremy Rifkin and Randy Barber encouraged SRI by pension funds. By 1980, presidential candidates Jimmy Carter, Ronald Reagan, and Jerry Brown supported socially focused pension investments.

SRI played a key role in ending apartheid in South Africa. International opposition to apartheid grew after the 1960 Sharpeville massacre. In 1971, Reverend Leon Sullivan, a General Motors board member, created the Sullivan Principles, a code for ethical business practices in South Africa. However, reports showed that U.S. companies did not reduce discrimination there. Because of this and political pressure, cities, states, colleges, faith groups, and pension funds in the U.S. stopped investing in South African companies. In 1976, the United Nations banned the sale of weapons to South Africa. From the 1970s to the early 1990s, major institutions avoided investing in South Africa under apartheid. This pressure eventually led businesses to call for an end to apartheid, though SRI alone did not end it.

In the mid- and late 1990s, SRI expanded to address issues like tobacco stocks, mutual fund transparency, and other concerns.

Since the late 1990s, SRI has focused more on promoting environmentally sustainable development. Many investors see climate change as a major risk to business. In 1989, Joan Bavaria and Dennis Hayes, who helped organize the first Earth Day, founded CERES, a network for investors and environmental groups working with companies on environmental issues.

In 1989, SRI industry leaders met at the first SRI in the Rockies Conference to share ideas and plan new efforts. The conference later changed its name to "The SRI Conference" and now meets yearly at Green Building certified locations. It has drawn over 550 people annually since 2006. The conference is organized by First Affirmative Financial Network, a firm that helps advisors create investment portfolios focused on sustainability and responsibility.

The first sell-side brokerage to offer SRI research was the Brazilian bank Unibanco. In January 2001, Unibanco’s SRI analyst Christopher Wells launched a service from the bank’s São Paulo headquarters. It provided free research on environmental and social issues for SRI funds in Europe and the U.S., as well as for non-SRI funds in and outside Brazil. The service lasted until mid-2002.

Inspired by SRI’s role in ending apartheid, the Sudan Divestment Task Force was created in 2006 to respond to the genocide in Darfur, Sudan. The U.S. government supported this effort with the Sudan Accountability and Divestment Act of 2007.

Recently, some SRI investors have focused on protecting the rights of indigenous peoples affected by companies’ practices. At the 2007 SRI in the Rockies Conference, a special session was held to address indigenous concerns. Other ongoing issues for SRI investors include safe working conditions, fair pay, product safety, and equal employment opportunities. In the mid-2010s, some funds developed strategies focused on gender equality to improve workplace fairness and the well-being of women and girls.

Current strategies

Socially responsible investing is becoming more popular in the United States and Europe. It is now an important part of how many investment funds and accounts make decisions. By late 2024, ESG ETFs, which consider environmental, social, and governance factors, had over 640 billion U.S. dollars in assets.

Government-controlled funds, like pension funds, are large investors. They are being asked by citizens and activist groups to support companies that act ethically, treat workers fairly, protect the environment, and avoid human rights violations. One example is Norway’s Government Pension Fund, which is required to avoid investments that might support unethical actions, serious human rights violations, extreme corruption, or major environmental harm.

In the 2000s and 2010s, pension funds faced pressure to stop investing in BAE Systems, an arms company. This was partly because of a campaign by the Campaign Against Arms Trade (CAAT). Liverpool City Council successfully passed a resolution to stop investing in the company, but a similar effort by the Scottish Green Party in Edinburgh City Council was blocked by the Liberal Democrats.

According to the 2014 Trends Report, the number of socially responsible mutual funds increased from 167 in 2001 to 415 in 2014. The total number of mutual funds using ESG factors has grown four times since 2012. In 2011, 20 ESG ETFs had $3.5 billion in assets, up from eight ETFs with $2.25 billion in 2007. Unlike the Employee Retirement Income Security Act of 1974 (ERISA), which limits how much socially responsible goals can influence pension fund decisions, registered investment companies can consider ESG factors if they follow the rules of the Investment Company Act of 1940.

The 2014 Report on U.S. Sustainable, Responsible, and Impact Investing Trends showed that 214 separate account strategies, with $433 billion in assets, used ESG factors in their decisions. However, if a separate account is subject to ERISA, it must prioritize maximizing returns for plan participants over other factors.

Shareholder resolutions are proposed by groups like public pension funds, faith-based investors, socially responsible mutual funds, and labor unions. In 2004, faith-based organizations filed 129 resolutions, while socially responsible funds filed 56.

Rules about shareholder resolutions differ by country. In the United States, they are mainly set by the Securities and Exchange Commission, which regulates mutual funds, and the Department of Labor, which oversees certain pension plans under ERISA.

These rules require pension plans and mutual funds to share how they voted on behalf of investors. In the U.S., groups like the Council of Institutional Investors, the Interfaith Center on Corporate Responsibility, and U.S. SIF help investors file resolutions together.

Between 2012 and 2014, over 200 U.S. institutions and investment firms filed or co-filed proposals. These groups managed $1.72 trillion in assets by the end of 2013. The most common issues addressed were political contributions, climate change, and environmental concerns.

Community investing is a type of socially responsible investing that supports local organizations. These institutions use money from investors to provide loans to groups or individuals who have been denied access to traditional financial services. Loans are used for housing, small businesses, education, or personal development in the U.S. and U.K., or to support local banks in other countries for community development. These institutions often offer training and support to help ensure successful investments.

Community investing grew by about 5% from 2012 to 2014. In the U.S., community development financial institutions (CDFIs) had $64.3 billion in assets at the start of 2014, up from $61.4 billion in 2012.

Investing strategies

Social investors use different methods to increase financial returns and help improve society. These methods aim to lower the cost of money for companies that use sustainable practices and raise the cost for those that do not. Supporters believe that access to money influences the direction of future development. Many rating agencies now collect information about how companies behave in terms of environment, social issues, and governance (ESG) and combine this data into ratings. Recently, the industry has seen fewer new rating agencies due to mergers and acquisitions.

ESG integration is a common strategy in responsible investing. It means including ESG factors—environmental, social, and governance—into the basic analysis of stock investments. According to the Investor Responsibility Research Center Institute (IRRCi), how ESG integration is done varies among investment companies based on:
– Management: Who is in charge of ESG integration within the company?
– Research: What ESG factors are being studied?
– Application: How are these factors used in practice?

Negative screening is a strategy that excludes certain investments based on social or environmental reasons. For example, many socially responsible investors avoid investing in tobacco companies.

The longest-running socially responsible investing (SRI) index, the Domini 400 (now called the MSCI KLD 400), started in May 1990. It has performed well, with average yearly returns of 9.51% through December 2009, compared to 8.66% for the S&P 500.

Studies have shown mixed results about how SRI funds affect financial performance. Some show positive effects, some show no effect, and others show negative effects.

Divestment means removing investments from a portfolio because of ethical or non-financial reasons related to a company's activities. For example, CalSTRS (California State Teachers' Retirement System) removed over $237 million in tobacco investments after reviewing financial data and making decisions.

Shareholder activism involves trying to influence a company's behavior. This includes talking with company leaders about concerns and voting on proposals. Supporters believe that working together, social investors can help companies improve financially and benefit stockholders, customers, employees, and communities. A review of studies found that about 90% showed no negative relationship between ESG and financial performance, with many showing positive results. This suggests ESG considerations can improve risk management, save costs, and help companies get funding, which benefits overall financial health. Recent efforts include "investor relations activism," where investor relations firms help shareholders push for changes in companies. Hedge funds are also major investors, though some focus on financial returns rather than social goals. Pension plans regulated by ERISA have limits on using funds for activism or promoting public policies, as any spending must help improve retirement income.

Shareholder engagement is a type of activism that involves closely monitoring the non-financial performance of companies in a portfolio. During these interactions, companies receive advice on how to improve their ESG performance.

Positive investing is a newer form of socially responsible investing. It focuses on investing in companies or projects that create positive social or environmental impacts. Unlike traditional methods that only avoid harmful industries, positive investing actively supports companies that make measurable improvements. Examples include investments in renewable energy (like solar or wind projects), affordable housing, education technology, healthcare innovations, and sustainable farming. These investments aim to generate financial returns while helping society and the environment. This approach allows investors to support social values, such as environmental protection or social justice, without harming portfolio performance. Positive screening emphasizes sustainability not only in environmental or humanitarian terms but also in a company's ability to succeed long-term. In 2015, Morgan Stanley found that investments with strong sustainability practices outperformed those with weak sustainability practices, showing that positive impact and financial returns can coexist. A 2015 report by the Global Impact Investing Network also found that many impact investments in private equity and venture capital achieved market-rate or better returns.

Impact investing is a type of private investment (like private equity) that focuses on creating social or environmental benefits alongside financial returns. In 2014, the UK's G8 presidency created a task force to define impact investing as investments that intentionally target specific social goals while aiming for financial returns and measuring progress toward both. Impact investing provides capital to businesses that create large-scale social or environmental benefits, which philanthropy often cannot achieve alone. This capital can take forms like private equity, loans, or credit lines. Examples include investments in microfinance, community development, and clean technology. Impact investing originated in the venture capital industry, where investors often take active roles in guiding companies or startups.

Investing directly in an institution, rather than buying stock, can create more social impact. Money spent on stocks in the secondary market goes to previous owners and may not help society, while investing in community institutions puts money to work. For example, investing in a Community Development Financial Institution might help reduce poverty, provide access to capital for underserved communities, or support green businesses. In 1984, Joan Bavaria, founder of Trillium Asset Management, invited Chuck Matthei of the Institute for Community Economics (ICE) to a meeting of the US SIF. This was likely the first time a nonprofit with a loan fund met directly with socially responsible investment managers. Trillium clients began investing in ICE later that year.

Global context

Socially responsible investing is a growing worldwide practice. Since businesses operate in many countries, social investors often choose companies that work internationally. As more investment options became available globally, so did opportunities for socially responsible investing. More people are choosing this type of investing in both wealthy and developing nations. In 2006, the United Nations Environment Programme created the Principles for Responsible Investment. These principles help investors consider environmental, social, and governance (ESG) factors when making investment decisions. Over 1,500 organizations have signed onto these principles, managing more than US$60 trillion in investments.

The Global Sustainable Investment Alliance (GSIA) is a group of organizations worldwide that focus on sustainable investing. These include groups like the European Sustainable Investment Forum, UK Sustainable Investment and Finance Association, Responsible Investment Association Australasia, Responsible Investment Association Canada, the Forum for Sustainable and Responsible Investment in the United States, the Dutch Association of Investors for Sustainable Development, and the Japan Sustainable Investment Forum. The GSIA’s goal is to increase the influence and recognition of sustainable investing globally.

The Global Sustainable Investment Review 2018 is a report that collects data from regional studies in Europe, the United States, Japan, Canada, and Australia and New Zealand. It gives an overview of sustainable investing in these areas at the start of 2018 by using detailed reports from GSIA members: Eurosif, Japan Sustainable Investment Forum, Responsible Investment Association Australasia, RIA Canada, and US SIF. The report also includes information about sustainable investing in Africa and Latin America from other sources.

The 2018 report shows that in the five largest markets, sustainable investments totaled US$30.7 trillion at the start of 2018, which is a 34% increase over two years. Between 2016 and 2018, Japan had the fastest growth in sustainable investments, followed by Australia/New Zealand and Canada. These same three regions also had the fastest growth in the previous two years. The three largest regions for sustainable investments, based on total value, were Europe, the United States, and Japan.

A 2020 study by Morningstar found that investments in sustainable funds reached nearly $1.7 trillion worldwide. More than $51 billion flowed into U.S. sustainable funds during this time.

ESG ratings agencies

Asset managers and other financial institutions are using ESG ratings agencies more often to evaluate, track, and compare companies' ESG performance. Sustainalytics and RepRisk are two examples of specialized ESG rating companies. Global credit agencies, such as S&P Global, are also adding ESG ratings to their services.

Responsible, ethical and impact investing in Australia

According to the Responsible Investment Association Australasia's 2020 Responsible Investment Benchmark Report Australia, in 2019, funds managed using responsible investment methods grew to make up AU$1,149 billion in total investments managed in Australia. This was an increase of 17% compared to 2018. More investment managers are using various responsible investing methods, such as ESG integration, negative screening, sustainability-themed investing, and impact investing.

The report shows that Australian and multi-sector responsible investment funds performed better than mainstream funds over 1, 3, 5, and 10-year time periods.

Australian responsible investment managers still prefer ESG integration and corporate engagement and voting as their main methods for building investment portfolios. However, they are increasingly directing funds toward sustainability-themed and impact investing. Allocations to Green, Social, and Sustainability Bonds more than doubled since the previous year.

Negative screening of fossil fuels by the responsible investment industry has increased. In 2018, only 5% of responsible investment assets under management for survey respondents who used negative screening excluded fossil fuels. In 2019, 19% of responsible investment assets under management excluded fossil fuels, an increase of 14 percentage points. For consumers using RIAA's Responsible Returns search and compare tool for ethical investments, the most important exclusionary screens are fossil fuels, human rights abuses, and armaments.

Responsible, ethical and impact investing in New Zealand

The Responsible Investment Association Australasia's 2020 Responsible Investment Benchmark Report for New Zealand provides information about the size, growth, and performance of the responsible investment market in New Zealand from January 2019 to December 2019. It also compares these results to the overall New Zealand financial market. In 2019, the total value of funds managed using responsible investment methods reached NZ$153.5 billion. This amount makes up 52% of the estimated NZ$296 billion in total professionally managed investments in New Zealand.

In New Zealand, responsible investors are increasingly focusing on environmental, social, and corporate governance (ESG) factors instead of only avoiding harmful industries like tobacco and weapons. Impact investing, which supports investments that create positive social or environmental change, grew significantly. It increased by 13 times, from NZ$358 million in 2018 to NZ$4.74 billion in 2019. Of all products using this approach, 88% are Green, Social, and Sustainability (GSS) Bonds.

Ethical investment in the UK

In 1985, Friends Provident created the first investment fund that avoided certain industries, such as tobacco, weapons, alcohol, and unfair governments. Since 1985, more than 90 investment funds have been started, offering different rules for choosing investments. Some funds avoid certain businesses, while others focus on supporting companies that help protect the environment or improve society.

Since 1985, many large investment companies have started ethical and socially responsible funds. However, this has caused much discussion because different companies use slightly different methods to manage their funds.

In recent years, there has been more interest in investments that support businesses with strong social or environmental goals. These investments aim to help solve important problems, such as poverty or pollution.

In the United Kingdom, organizations are increasingly involved in social investing through impact investing funds. Examples include Deutsche Bank, NESTA, and Big Issue Invest, which is part of The Big Issue group.

As of June 2014, EIRIS estimated that over £13.5 billion was invested in green and ethical retail funds in Britain. This estimate includes about 85 funds based in the UK and does not include money invested in ethical funds located outside the UK.

In higher education

In 2007, the Dwight Hall organization at Yale University started the first investment fund in the United States that is run by college students and focuses on socially responsible causes. This fund is called the Dwight Hall Socially Responsible Investment Fund.

In 2013, the University of Edinburgh created a detailed plan for responsible investing. This made the university one of the first in the United Kingdom to do so. The plan includes selling investments in fossil fuels and putting more money into renewable energy and green technology.

Comparison with conventional investing

Conventional investing focuses on risk and returns when making investment choices. Socially responsible investing (SRI) also considers ethical factors, as discussed earlier. This raises the question of whether being ethical in investments can lead to financial benefits. The debate about whether SRI investments perform better or worse than conventional investments is still ongoing. Studies have not found clear evidence that SRI investments outperform conventional ones or the opposite.

Many studies have compared the performance of SRI and conventional investing using different models and methods. One study used the Carhart four-factor model and found that buying stocks with high SRI scores while selling those with low scores led to an average annual return of 8.7%, suggesting ethical goals can be met without harming financial results. Another study using the same model found environmentally friendly companies earned an extra 7% return. However, other research using similar methods found no significant difference in performance between SRI and conventional stocks. A study also found that portfolios including "sin stocks" (alcohol, tobacco, gaming) outperformed similar stocks, which might suggest SRI investors could lose out. But after accounting for manager skills, fees, and costs, no difference was found between portfolios with "sin" stocks and SRI portfolios.

Other studies compared SRI funds with conventional funds. Some used the capital asset pricing model, while others used models like the Fama–French three-factor model or Carhart four-factor model. These studies found no major differences in performance between SRI and conventional funds.

Differences in fund performance may depend on how funds are managed or constructed, not just the type of investments. Some studies compared stock market indices instead. One early study compared the Domini 400 Social Index with the S&P 500 using the Sharpe ratio and capital asset pricing model. No major differences in performance were found. A later study compared four SRI indices with the S&P 500 from 1990 to 2004. It found SRI indices had slightly higher returns, but the difference was not statistically significant. Other studies compared 29 global SRI indices with conventional indices. Using the capital asset pricing model, no major differences in performance were found. A global comparison using marginal conditional stochastic dominance found "strong evidence that socially responsible investing may cost more financially."

A recent study found that improving corporate social responsibility (CSR) reputation can increase profits.