Socially Responsible Investing 101

Your guide to aligning your investments with your values.

Chris Norris
Jan 24 · 3 min read

The follow is an excerpt for an eBook we wrote called Socially Responsible Investing 101. Click here to download the full guide.

Photo by Matteo Paganelli on Unsplash

Why did we write this?

We believe our values should be reflected in everything we do, including our investments, but this approach — socially responsible investing — is still a relatively new concept within the investment world. There are a lot of misconceptions about it and a lot of people still looking to learn more. We wanted to write something that was easy to understand and applicable to any investment portfolio.


What is socially responsible investing?

Socially responsible investing (SRI) is an investment strategy that balances financial goals and social responsibility. It may also be called social investment, sustainable investing, responsible investing, and often used interchangeably with impact investing.

3 key factors measure the social responsibility of an investment: environmental, social justice, and corporate governance (ESG). Companies receive a score based on their commitment to these factors. Those with good scores are considered socially responsible investments and those with bad scores are not.

These scores were created by a company called KLD Research & Analytics Inc. They are one of the OG’s of socially responsible investment screening. If you hear the term KLD score know that it’s referring to whether or not a company is a socially responsible investment.

Along with the score, KLD created the KLD 400 Social Index (aka KLD 400). It’s a list of 400 companies that have been rated socially responsible investments based on ESG factors. There are several other indices that identify companies as socially responsible investments or not, but KLD 400 is the most widely recognized.

This guide is a series of questions and answers about socially responsible investing. We wanted to answer some of the most common questions we hear and explain in more depth the history of socially responsible investing, its impact, its overall performance, and the social issues that can be addressed.


What does ESG mean?

The 3 ESG factors measure the sustainability and ethical impact of an investment. Here’s what each of them include.

Environmental

Recent reports show the impact of climate change both around the world and in the United States. It’s a social issue with the capability of negatively affecting all of us.

Companies that regularly deplete natural resources or exacerbate the negative effects of climate change score low on the KLD. This includes fossil fuel companies, oil companies, and nuclear energy, among others. On the other hand, companies investing in green or renewable energy technologies, such as solar or electric power, score high.

Social Justice

Companies that focus on diversifying their workforce aren’t just doing the right thing; they’re doing the smart thing. By broadening their talent search companies increases the chances they find the optimal person for a job and contribute to inclusion efforts.

Social justice also means focusing on human rights and the supply chain. Companies that use factories with unsafe or unjust working conditions will earn low KLD scores. So will companies that do business with oppressive regimes and in war zones, which includes war profiteering or issues like Sudan Darfur.

Corporate Governance

Similar to diversity in the workforce, companies that diversify their board of directors will earn better KLD scores.

Beyond just diversity at the highest level, companies that implement internal policies and process to improve employee relations score well. This includes instituting sexual harassment trainings, creating a safe work environment, closing the gap between male and female employees’ wages, and being transparent about executive compensation.

To download the full eBook click here.

To get started as an impact investor click here.