Why ‘Socially Responsible Investing’ is Becoming More Popular

As millennials continue to swell the stream of working adults, their investment choices are taking what may be an unexpected turn away from the traditional opportunities.

The retirement dynamics for millennials continues to shift as this upcoming demographic segment looks for ways to reflect their personal values with their investment dollars. While Baby Boomers and older generations looked to Social Security for the majority of their end-of-life expenses, millennials don’t expect to receive support from the government in the same way.

Organizational pensions are also going by the wayside as businesses look for ways to cut expenses, leaving a deeper emphasis on personal contribution plans such as 401(k)s and IRAs. With this comes an opportunity for younger workers to define their investment strategies and many are selecting to invest in green, sustainable and socially responsible options.

All of this has led to a new trend on behalf of young professionals — and it’s something investors of every age need to be aware of.

What is Socially Responsible Investing?

Socially responsible investing, often referred to as SRI, is the desire to steer your investments towards entities that are focused on ways that are perceived to make a difference in the world.

While it has been difficult in the past to attract investor interest, millennials are driving a new desire to move in this direction with their retirement funds. CEOs regularly note that sustainability is a focus for their business both now and in the future, with many integrating it into their overarching strategies and vision.

Environmental, social and governance factors (ESG) all play a part in determining whether or not a particular organization is considered to be “socially responsible” or “sustainable.” To truly be considered an ESG, businesses must also avoid selling or producing addictive substances such as tobacco, gambling and alcohol.

Defining Sustainable Investments

Identifying SRIs can take a little research to find the right investment for your risk appetite as well as your sustainability requirements. Sustainable investment options may have a narrow focus, such as clean energy, or could have a much broader core.

While younger investors may be willing to support businesses with a narrower target, it’s important to keep in mind that few millennials are saving as much for retirement as they should be. Poor decisions during the early years of investing can cause serious financial challenges that are difficult to overcome as individuals near retirement age. T

here are several criteria financial advisors often consider when building a socially responsible investment portfolio:

  • Risk tolerance
  • Liquidity needs
  • Tax concerns
  • Regulatory and legal factors
  • Time horizon
  • While the goal is to create an investment portfolio that is focused on supporting efforts to improve the world we live in, there must be a balance between this need and specific ROI goals.

    SRI Performance

    With close to $9 trillion invested leveraging sustainable and responsible strategies, there is a significant growth in this direction over the past few years.

    More than 1,000 funds in a variety of formats from variable annuities to mutual funds are the core of the ESG ETF (exchange-traded funds) index — which tracks closely to the S&P 500. The 75 million millennials currently living in the U.S. represent the country’s largest living generation and the prime investors in sustainable funds.

    The positive impact of this massive influx of funds to the ESG infrastructure allows Millennials to represent their values and beliefs in a tangible way. What’s better, SRIs tend to perform strongly and have since overcome the stigma of the 1990s against sustainable investments, which were thought to bring in lower returns overall. Turns out, companies that are focused on the significance of their actions — from fair employment practices and workplace safety to environmental impact — tend to have strong financial performance as well.

    Millennials are far from the only generation working towards making a difference in the world through investment dollars, but they are the largest segment. As the popularity of SRIs continues to grow, investors of all ages are taking notice as a way to encourage positive change through good corporate citizenship.

    Millennials are still two times more likely than the general population to select their investments based on environmental or social goals. With one in five dollars now headed towards SRIs and more investors understand that there is no significant financial tradeoff for moving in the direction of sustainable investments, it’s a strong likelihood that investor interest will continue to rise.

    Regards,

    Ethan Warrick
    Editor
    Wealth Authority