Socially Responsible Investing

Thu, Mar 12, 2009

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Now more than ever, investors are paying attention to the impact of their investments on the global environment and the well being of people around the world. As this trend has increased, so has the demand for investment choices that demonstrate not only financial soundness, but also a concern for quality of life. This investment philosophy, known as socially responsible investing (SRI), has a special appeal to many individuals concerned with the future of our planet. Because it’s no longer politically correct to disregard socially and environmentally conscience investments, more investors are putting their dollars into SRI.

What Constitutes Socially Responsible Investing?

Investors who adopt an SRI strategy believe their investments should be governed not only by economics, but also by social issues. This often means refraining from purchasing stocks of companies that produce products or offer services the investor disapproves of, regardless of the company’s profitability and potential future stock value. It can also mean investing in companies that promote workplace diversity, actively participate in community volunteer programs or work to improve the environment. SRI can involve investing in charities that perform work you believe in.

Benefits, Drawbacks and Strategies of SRI

As with all types of investing, there are tradeoffs that come with socially responsible investing. Those who practice SRI can have a clear conscience about their investment choices, knowing they are not violating their core beliefs. However, socially responsible investors must balance this benefit with more limited financial choices with regard to diversification, although choices range from government to bond options.

The following strategies enable individuals to put their money to work in ways that can enhance the world – through traditional investing that offers the potential for financial gain or charitable investments that offer tax benefits.

  • SRI mutual funds combine companies that many socially responsible investors support, making it easy to find potential investments that are consistent with your principles and at the same time, produce solid returns.
  • A charitable remainder trust is a legal arrangement that allows you to donate your property or money to a cause you believe in while maintaining control and even receiving income from the trust while you are still living. This kind of trust offers several tax advantages to you and your estate. It is irrevocable which means it cannot be changed, but you can determine how your money is invested and choose a charity in line with your values.
  • Donor-advised funds are administered by a third party to offer an affordable, convenient tax advantage vehicle for charitable giving. They provide a no-hassle way to give to multiple charities over time and can be especially attractive if you have appreciated stock or property that would generate a big tax bill if cashed in. Not just for the very wealthy, donor-advised funds can be purchased at relatively low levels ($5,000 and above).
  • Micro-financing is another way to charitably invest. Your money would support small businesses that otherwise would not be eligible for traditional financing.
  • Community-investing notes direct capital from investors and lenders to communities that are underserved by traditional financial services institutions. It makes it possible for local organizations to provide financial services to low-income individuals and to supply capital for small businesses and vital community services, such as affordable housing, child care, and healthcare. According to Socialinvest.org, community investing has grown more than 540% in the past decade.

Building a Socially Responsible Portfolio

To invest according to your ethical standards, research your investment decisions carefully. SocialFunds.com is an extremely comprehensive and well organized guide to social investing. The Social Investment Forum (socialinvest.org), a nonprofit organization that promotes socially and environmentally responsible investing, also provides extensive information that may help you get started. The Green Money Journal (GreenMoney.com) offers insight into SRI as well.

Many investors find that investment clubs are an excellent way to learn about SRI. If you are interested in an investment club, the National Association of Investors Corporation website at Betterinvesting.org can give you pointers on how to find or start a club.

If you think an SRI strategy fits your financial objectives, consider working with a financial advisor to get professional advice about possible investment opportunities. A financial advisor can help you find appropriate SRIs and brainstorm options for future investments that satisfy both your financial goals and your desire to invest ethically and responsibly.

By Richard Atkison. Richard G. Atkison is a Financial Adviser at Ameriprise Financial and he welcomes questions at richard.g.atkison@ampf.com.

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