What is socially responsible investing? How it works and why investors are choosing it

More investors than ever are asking not just how much their investments are earning but what their investments are supporting. That's the idea behind socially responsible investing (SRI), an approach that balances financial returns with ethical, social and environmental impact.

At its core, SRI is about aligning your money with your values. If you believe money is a tool that can shape the kind of world you want to live in, SRI can give you a framework for building a portfolio that reflects what matters most to you, whether that's environmental stewardship, human rights, nonviolence or something else.

Socially responsible investing is putting money into companies and funds that align with your values while avoiding those that don't. SRI aims to generate competitive financial returns alongside positive social or environmental outcomes, ultimately using your funds to contribute to a society you want to live in.

ESG (environmental, social and governance) is not the same thing as SRI. ESG can help you ask questions about how a company operates, but it won't tell you whether an investment aligns with your values.

• SRI is about ethical alignment. It's an investment philosophy that involves choosing companies and industries whose impact on society is something you agree with.
• ESG is about material risks and opportunities. It's a framework for evaluating how a company manages environmental, social and governance factors that could affect its financial performance and viability. ESG isn't necessarily focused on a company's societal impact but how those factors influence business outcomes.

You can use ESG analysis when selecting investments for your socially responsible portfolio, but it's generally not the deciding factor. For example, you might prefer to hold stocks of companies with ESG attributes like diverse leadership and a commitment to reducing plastic waste. But if that company makes weapons and you value nonviolence, it likely doesn't align with your personal SRI criteria.

The demand for values-aligned investing has grown, especially among millennials and Gen Z investors. Many people want the best of both worlds—strong investment performance alongside the positive societal changes they want to see.

SRI was once a niche strategy with a reputation for subpar returns and high fees. But as of 2024, more than $52.5 trillion in U.S. assets under management could be categorized as sustainable investments. Increasing popularity has meant more competiton, which has led to decreased fees. This has made it so investors can more easily access socially responsible strategies.

It remains unclear whether SRI helps, hurts or has no effect on a portfolio's returns. Without any obvious downsides, SRIs may continue to become mainstream. Therefore, investors interested in putting their money toward societal issues can consider building a carefully constructed, diversified SRI portfolio.

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Investors take a variety of approaches to choosing investments that align with their values. Here are some common methods to help you choose the path that best matches your goals:

• Negative screening involves avoiding investing in companies that conflict with your values. Some examples include tobacco, weapons, fossil fuels, gambling, alcohol and animal testing.
• Positive screening involves a fund manager who selects companies leading their industries in environmental or social practices. Examples include clean energy, affordable housing, education, financial inclusion and sustainable agriculture.
• ESG integration incorporates environmental, social and governance metrics into financial analysis. A company might be included or excluded because of how it treats its employees and the communities where it operates, how much it pays executives compared to lower-level workers, its use of natural resources and its contributions to environmental pollution, among other factors.
• Shareholder advocacy goes beyond investing money in socially responsible companies by using shareholder rights to influence companies' behavior. By holding enough shares or forming a coalition of like-minded investors, shareholders can file resolutions, vote on company proposals and demand accountability from company leaders.
• Community investing involves investing in companies that support underserved or undercapitalized communities. Examples include credit unions and community development financial institutions that provide banking services, loans, tax credits, grants and financial education to marginalized individuals and mission-driven organizations.

Socially responsible investments exist across many asset types. Whether you're looking to build your own portfolio, invest in an existing one or do a little of both, you have plenty of options. Here are a few to consider:

These funds screen companies based on SRI criteria. For example, some SRI index funds that offer broad diversification, passive management and low fees while excluding companies in industries such as fossil fuels and adult entertainment. You also can find SRI exchange-traded funds (ETFs) that invest in companies working toward sustainable development goals and mutual funds that avoid alcohol, tobacco and firearms companies. Funds can invest in stocks, bonds or both.

These bonds lend money to governments (e.g., green municipal bonds) or corporations that want to finance environmentally friendly projects such as light rail expansion or renewable energy. You can buy green bonds directly or hold them indirectly through an SRI bond fund.

These online automated investment services allocate your money to a portfolio of various assets, then rebalance and tax-loss harvest as needed with the goal of optimizing your results for minimal effort and cost. You may be able to start with a broad SRI portfolio, then add or remove specific investments to customize your portfolio to your values.

Instead of owning shares of corporations indirectly through a fund, you can own them directly. Direct stock ownership allows you to build a custom portfolio by choosing companies that reflect your values. It provides more control, but you'll be responsible for managing it.

Research to date doesn't suggest that SRI consistently brings lower returns. As with any investment strategy, the long-term performance of an SRI strategy depends on asset selection, portfolio management, tax efficiency, diversification, fees and market conditions.

Studies that have tried to demonstrate how SRI impacts returns tend to be flawed. A common problem is that categories like SRI, ESG, and sustainable investing don't have agreed-upon definitions. That makes it hard to apply any findings to other similar but yet different investment categories. Some research also omits discontinued funds, which gives the results a survivorship bias, or look at a selective time period that makes SRI look better or worse than it might actually be.

There isn't solid data showing whether SRI as a whole delivers better or worse returns than conventional investing. Instead, as with any investment strategy, results vary by fund. With that in mind, doing good and doing well can go hand in hand. Portfolio performance depends more on your strategy than its connection to SRI.

Socially responsible investing can help you align your money with your values without necessarily giving up performance. Whether you're passionate about reducing ocean pollution, providing safe workplaces or sourcing sustainable lumber, SRI offers a way to support causes you care about while earning the returns you need to meet your personal goals.

You can get help exploring socially responsible investments and building a portfolio you can feel proud of by meeting with a Thrivent financial advisor who understands both your financial goals and personal values. They can help you evaluate your options and incorporate SRI into your financial plan.