8 Ways to Build a Socially Responsible Portfolio

Rebecca Lake

Promote responsibility while earning returns.

Socially responsible investing or SRI is trending up, with sustainable investments increasing 38% between 2016 and 2018, according to data collected by US SIF. "The appeal of socially responsible investing is the intentional ability to align your money with companies that share your same values," says Bruce Langer, a chartered financial analyst at EPIQ Partners in Minneapolis. "With patience, a more sustainable investment will be just that; it will be more sustainable in the long run, leading to better performance." Investment selection is critical for maximizing financial impacts, as well as social and environmental ones. Keep these eight rules handy when constructing a socially responsible portfolio.

Connect with your values.

Clearly defining values is a critical first step in socially conscious investing, says Will Lofland, director and head of intermediary sales at GuideStone Financial Resources in Dallas. "That will define what you really don't want to own," he says. It may be helpful to view investments on a spectrum. At one end are companies that align 100% with a specific value, then there are companies that are completely counter to that value. The remaining companies fall somewhere in the middle. Lofland says utilizing this perspective can help with identifying investments that are a values mismatch.

Know the basics.

Socially responsible investing, ESG investing, which stands for environmental, social and governance, as well as sustainable investing often get lumped under the same umbrella, but there are subtle differences between them. "It's not rocket science, but it's really important to understand some basic concepts and nuances, such as ESG analysis, or how and why certain sectors are excluded," says Naïm Abou-Jaoudé, CEO at Candriam and chairman of New York Life Investment Management International. "Treating employees fairly, caring for the environment, data privacy or business ethics may seem like more intangible aspects but they're significantly material when it comes to companies' business development and overall brand reputation," Abou-Jaoudé says.

Scratch the surface of SRI funds.

Experts generally agree that mutual funds and exchange-traded funds, which are mutual funds that trade like a stock, offer simplified diversification with less risk compared to investing in individual stocks. Ryan Cole, a private wealth advisor and managing partner of Citrine Capital in San Francisco, says the main problem with a mutual fund or ETF strategy is that investors lack direct control over where their money is invested. When choosing funds for SRI investing, Cole says it's critical to be familiar with its underlying assets to ensure that the included companies' respective missions align with personal values.

Don't get boxed in.

While it's possible to be too broadly diversified with socially conscious or sustainable funds, it's also possible to end up with too narrow a focus. "Concentrated portfolios are another thing investors should avoid," Cole says. He's referring specifically to focusing sustainable investments on just a handful of industries, to the exclusion of others that may prove beneficial to a portfolio. Cole says this type of approach can contribute to a more volatile and riskier portfolio.

Balance impact with performance.

Socially conscious investing puts a spotlight on furthering causes but investors shouldn't lose sight of their financial well-being, says Taylor Sutherland, a senior wealth advisor at Halbert Hargrove. "A too-pristine solution may exclude many categories of investments that can hurt an investor's long-term returns and/or increase their risk," he says. Investing responsibly shouldn't mean sacrificing portfolio growth. On the contrary, Sutherland says improving investment outcomes should be the goal, since that can directly affect investors' ability to support their preferred causes over the long term.

Use the right metrics to screen investments.

Due diligence is essential in choosing socially responsible funds, says Pete Krull, CEO and director of investments at Earth Equity Advisors in Asheville, North Carolina. Positive screening is an inclusive strategy which emphasizes companies and investments that fit the responsible mold "to a T." "Look for investment managers that have built sustainability and responsibility into their DNA and processes," he says, and avoid ones who direct decision-making based simply on matching or beating a benchmark index.

Dig deeper.

Greenwashing is a practice that refers to making a company appear more environmentally friendly than it is, and it can cause socially responsible investors to put their money in places they otherwise wouldn't. It's a tactic investors need to be aware of. "Sustainable investing is suddenly the hot trend so be wary of investment products with a sustainable or socially responsible label hastily slapped on the side," says Jay Lipman, co-founder and president of Ethic. "This practice often extends to companies that ostensibly promote socially responsible practices, so be sure to look under the hood of your portfolio."

Ask questions.

When creating a portfolio that's values-focused is new territory, investors may benefit by getting help from their advisor. "There's not a cookie-cutter approach to building an SRI portfolio," says Jane Petty, investment product specialist for Wells Fargo's social impact investing team in Minneapolis. "Values, intentions, knowledge, authenticity and commitment of the investment manager are key so investors shouldn't hesitate to ask a lot of questions." The result should be a portfolio that's as tailored as possible to the values -- and objectives -- of the individual investor. "If you don't understand it or an advisor can't help you understand if it aligns with what you want, don't invest," Petty says.

A few ways to build a socially responsible portfolio.

-- Connect with your values.

-- Know the basics.

-- Scratch the surface of SRI funds.

-- Don't get boxed in.

-- Balance impact with performance.

-- Use the right metrics to screen investments.

-- Dig deeper.

-- Ask questions.