Socially Responsible Investing: Robo Advisors and What’s Right for You

Socially responsible investing (SRI) is the practice of investing in companies that reflect the investors’ values. Also known as ESG (Environment, Social, Governance) investing, SRI has become a central facet of the modern market, as the interconnectedness of the modern world has made investors painfully aware of the effects that their investments have elsewhere. 

For new investors interested in beginning their investment journey, user-friendly options, like using a robo advisor (i.e., Wealthfront, Betterment, etc.), have become an attractive option to invest responsibly due to their general accessibility and low fee structure, but it’s not right for everybody.

Although easy to gain entry, newcomers are still left scratching their heads with many questions about SRI and how they work with robo-advisors:

This overview will cover all you need to know about working with a socially responsible investing robo advisor. Learn about the basics of what SRI investing actually is, the pros and cons for the practice, and what SRI investing looks like when using a robo advising service (and whether it’s right for you).

Determining if a Company Is Socially Responsible

Because SRI depends a great deal on individual investor preference and ideology, there is no one metric to determine whether a company is a socially responsible investment. For example, investor A might prioritize workers’ rights and invest accordingly while investor B is more concerned about environmental impact, leading them to look elsewhere. In this sense, getting involved in SRI is a lot about determining what your values as an investor are and finding companies that have a similar vision.

However, Company Social Responsibility (CSR) is measured according to several KPIs that mark them as high-value SRI investments. These are distinguished between: 

Category

Central Question

Relevant KPIs

Customer Satisfaction

How does the company treat its customers?

Customer Satisfaction, Event Participation, Marketing Tactics, Complaint Resolution

Working Conditions

How does the company treat its employees? 

Wages, Hours, Breaks/Lunches, Vacation/Time Off, 401k/retirement 

Sustainability Model

What kind of impact does the company have on the environment? 

Emissions, Water Use, Energy Consumption, Waste

Financial Responsibility

Does the company pay its fair share of profits back to the community?

Profit, Tax Records, Revenue Growth, Social Return on Investment (SROI), Healthy Cash Flow

The benchmark for each KPI listed above will vary depending on the industry. Impact investors should seek out the norms of the relevant industry when evaluating a company to determine its SRI value. A few other options to investigate the SRI value of a prospective company are to: 

  • Look at Reviews: See what existing customers/employees/experts have to say about the company in question. Ideally, reviews should be available on the company’s site (indicating good transparency) but searching something as simple as “company name [review]” will take searchers to a host of 3rd-party sites (Glassdoor, Indeed, etc.) that specialize in offering full reviews from a number of different viewpoints. 
  • Review Company Mission & Goals: Take a brief look at the company’s site and media presence. A company that prioritizes social responsibility will not hesitate to tell you about the good work that they are doing for their community, be it global or local. Searchers should be quick to distinguish between pleasant words and measurable actions, however.

Any company, good or bad, can write up a press release to make themselves sound better than they are. Instead, focus on what the company has actually done to realize its vision.

Determining whether or not a company is socially responsible helps impact investors decide whether or not they want to invest their money. Once a quality candidate has been decided from the SRI side of the equation, however, they then need to determine the profitability of that choice.

Is SRI Investing Profitable?

It may surprise you to learn that socially responsible investing sees largely the same rate of returns as traditional investments. In fact, some studies have shown that they can generate larger yields, assuming that investor money flows in time with the dominant values of the day. 

Simply put, when a company puts forward values that the rest of the world gets behind, they profit along with the investors themselves. There are a few of ways to hedge your risks:

  • SRI Index Funds: Similar to traditional index funds, there are ESG-approved ETFs and other mutual funds directed towards companies with a high ESG value (e.g., VanEck Investment Grade Floating Rate ETF, Bloomberg Investment Grade Floating Rate ETF, and iShares Floating Rate Bond ETF).
  • Private Investing: Many investors choose to do the heavy lifting themselves, researching companies and working with a low-level brokerage firm to facilitate trades.
  • SRI Investment Planning: Some impact investors choose to work with a seasoned expert with experience in SRI investments. These advisors can help impact investors identify companies in line with their values and offer guidance on investment strategy moving forward.

In large part, the profitability of SRI investments is due to the growing pressure for companies across all industries to adhere to better operational standards as a result of a more interconnected world. Because impact investors are making up an increasingly large portion of the investment sector, more and more companies are needing to at least project an image of social consciousness, even if they don’t actually do anything. 

In a nutshell, this is the whole idea of impact investing in the first place—putting your money with companies that you think are likely to make a change encourages the companies that are missing out to consider a more socially conscious approach to their company’s vision.

The Most Common Risks of Socially Responsible Investing

The important thing to understand about SRI risk, however, is that impact investors make their decisions based on what they see as an overall good. While any investment has personal stakes, SRI focuses on creating the kind of world that you want to see; as a result, most impact investors are less interested in the risks involved. 

That being said, socially responsible investing, like any other investment, can be prone to risk with the wrong captain at the wheel. 

  • Limited Investment Options: Limiting your investment options to just companies you see as ethically sound inherently limits your opportunities to turn a profit. This may mean looking at more long-term investments rather than short-term strategies.
  • Potentially Minimal Returns: Many SRI funds typically operate as Exchange-Traded Funds (ETFs), which emphasize investing across many companies to mitigate losses on a single stock. While these are helpful to reduce your losses, they typically generate smaller returns than more aggressive funds.
  • Prone to Changes in Public Opinion: Finally, SRI investing is prone to up or down gaps in investments following major changes in the public mindset. For example, an impact investor might see that McDonald’s stock is currently included on the iShares MSCI KLD 400 ETF and choose to invest only to have that investment gap down should the ethical treatment of service workers become a bigger priority for most impact investors.

It’s important to remember that not everyone has the same values you do, so keep that in mind as you scan the ESG landscape. Much in the same sense that SRI investing requires investors to be aware of their initial decisions, it similarly requires them to keep up with those investments should the public mindset change. 

In this sense, investors should be prepared to keep close tabs on these companies (and the shifting public perception of them) to make the proper adjustments to their investment strategy moving forward and be wary of platforms that encourage a more “hands-off” approach.

How Does a Socially Responsible Investing Robo Advisor Work?

Robo advisors work using carefully formulated algorithms to recognize patterns in the market and make trade predictions accordingly. They are often pitched as being affordable doors into the world of investing for everyday people. While this is true, robo advisors have a couple of cons that make them a less than ideal choice for socially responsible investing. 

Pros

Cons

  • Automated accounting
  • Accessible fees
  • Ease of use
  • Limited portfolio options
  • Limited adjustability
  • Encourages a “hands-off” approach

As one can guess from the table above, the drawbacks of robo advisors make them less than ideal candidates for SRI investing. Without the ability to effectively select and adjust the companies you are investing in, socially responsible investing isn’t a realistic option. Moreso, several robo advisors limit investors to ETFs and don’t allow them to invest in single stocks until they have invested a large amount of money. 

This means doing a great deal of traditional investing before you ever get the chance to start being pickier with your strategy. Investors who are still interested in working with a socially responsible investing robo advisor should consider a couple of options:

ETF Selection:

Although your robo advisor may not provide you with a lot of options for specific stocks to invest in, they should at least provide you with a few selections for the ETFs they trade in. This may not provide you with the level of specificity that you are hoping for, but it can be a good opportunity to get your feet wet with SRI and decide whether it is an investment strategy you wish to pursue further with more resources.

Financial Consultation:

It’s always a smart idea to consider working with a more knowledgeable party to determine the best options available to you via your robo advisor. Although this is, by far, the best option, consulting services are rarely, if ever, provided by the robo advisor themselves. This will mean using your own resources to seek out a trusted partner. It is also important to consider that More fundamentally, however, these advisors can answer important client questions about how investing works and help them understand the inherent risk associated with investing. Having these relationships at the heart of your financial journey creates happier clients who are more likely to stay for the long term. If the equation says to sell on a downturn, the AI will always sell on a downturn unless another variable gives it a reason not to. In fact, this is the whole reason quants are employed by robo-advisors following the creation of the bot in the first place—they are needed to adjust those equations as necessary to create a stable investment strategy.

Even with these recommendations in mind, robo advisors are simply not developed enough to allow the necessary selection options for effective SRI investing, despite remaining accessible options for investing overall. Aspiring impact investors should consider more personalized options to develop a more personalized investment strategy.

Additional Challenges of Socially Responsible Investing

As the name suggests, socially responsible investing requires an individual to be socially responsible. It means doing a lot of research on your own to make sure that your investment decisions reflect your values while also keeping an eye on the markets themselves to see what investment options you have in the face of economic downturn or just general uncertainty. 

Doing that research means developing a working knowledge of how companies (and their various industries) work. This means:

Picking the Right Companies:

No one is perfect, and companies are no exception. While a given enterprise may have an outstanding environmental record, it may be more lackluster when it comes to looking at its record on workers’ rights. Few companies, if any, can truly check every box, which leads many prospective impact investors to pick and choose which causes they feel are most deserving of their money.

Understanding the KPIs:

Getting a good handle on something inherently quantifiable (emissions or wages, for example) is relatively easy, but there is no perfect way to measure something more abstract like “employee satisfaction.” Companies attempt to do this in a number of ways, but the concept is inherently theoretical, making it difficult to pin down for the sake of making an investment decision. Similarly, understanding the quantitative metrics requires a working knowledge of the industry itself—something not everyone has.

In both cases, socially responsible investing is really a process of learning about yourself—what are the things that you really care about? What are the things you are willing to overlook? What are the possible “yellow flags” (things that aren’t an immediate non-starter, but merit further attention)? These are important to consider, both when selecting a company to invest in, but also when thinking about industry-relevant KPIs. For example, how far below the industry benchmark are you willing to go on employee wages if the company has a good diversity ranking? Everyone is going to have a different answer to these questions, so it’s important to have these lines drawn for yourself before moving forward.

The Best Socially Responsible Investing Options

Most people tend to go towards the path of least resistance; for this reason, socially responsible investing robo advisors appear to most newcomers as particularly attractive options. Their user-friendly interface, however, covers an investment model that lacks many of the ideal options for impact investing. This, combined with the pressures of researching companies on their own, leaves many newcomers believing that they have few, if any, opportunities to invest responsibly.

There are, however, better socially responsible investing options out there. Companies like RIMAR Capital, for example, allow investors to tailor their investment strategy on a far more minute level than is available via any robo advisor. Similarly, we offer in-house consultation services with a seasoned investment veteran to help newcomers determine the best strategies to meet both your needs as well as your ethical standards. Best of all, we are taking new clients for as little as $1,000 and charge no annual fees. Contact us if you are interested in an initial consultation.