Socially responsible mutual funds

Socially responsible mutual funds give investors a way to invest in companies that align with the issues that are important to them and a way to exclude companies that don’t align with their values. These mutual funds are often defined by their environmental, social, or governance-focused investing strategy. 

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What is a socially responsible mutual fund?

Socially responsible investing (SRI) is any general investing strategy that considers environmental, social, and corporate governance factors. Socially responsible mutual funds fall into an investment strategy often called impact, ESG, or sustainable investing. These funds strive to generate positive financial returns while making an environmental or societal impact. 

Common approaches to SRI include:

  • Values-based investing, also called negative screening, which focuses on excluding companies from the portfolio. This approach appeals most strongly to investors who care about avoiding investments in companies that don't align with their values.
  • Integration, which attempts to improve the risk/return profile by considering environmental, social, and governance (ESG) risks in the investment process. In this approach, portfolios are constructed by selecting companies that score well on material ESG issues that are important for those companies' sector.
  • Impact investing, which refers to explicitly deploying investment dollars in an effort to directly achieve a desired outcome. Impact investors are typically more concerned with making a difference in the world or environment through the companies they invest in.

How do you incorporate a socially responsible mutual fund into your portfolio?

For any investors who care strongly about ESG issues, SRI can be an attractive investment strategy. Similar to non-SRI investments, investors should consider the quality of the mutual fund, such as its costs, risks, performance potential, and experience of the investment team. Then, investors should consider how the vehicle aligns to their preferences by further examination of the mutual fund’s holdings.

View a list of socially responsible funds available at Schwab.

What are the pros and cons of socially responsible mutual funds?

  • Pros

    Align with investor's values
    Socially responsible investing is a widely accepted investment approach that may allow investors to align their investments with their values without sacrificing performance. 

    Risk reduction
    Socially responsible investing may reduce the risk of owning companies that show up in the headlines for environmental catastrophes, fraudulent behavior, etc. While the overall investment risk for SRI portfolios is similar to non-SRI, SRI-focused funds try to avoid companies with poor governance and high environmental risk. 
     

  • Cons

    Lack of customization
    Investors do not have the ability to customize individual portfolio holdings to exclude securities that may conflict with their values or include companies they wish to invest in.

    Greenwashing
    As the investing public has grown more interested in SRI, some money managers have begun to talk about SRI aspects of funds that formerly were not described in those terms. In some cases, the degree of SRI focus in the fund is minimal and describing such funds as SRI is known as "greenwashing." Signs that indicate an SRI fund may be greenwashed include:

    • Very weak references to SRI factors in the fund's investment objective and description.
    • A fund that had no references to SRI in recent years suddenly adding in SRI terminology to the fund documentation or prospectus.
       

What factors to consider when choosing a socially responsible mutual fund?

  • Values icon

    Values

    Are there specific values or beliefs that you want to incorporate into your portfolio?

  • Engagement icon

    Engagement

    Do you prefer funds that actively engage with companies, including proactive proxy voting on ESG issues?

  • Transparency icon

    Transparency

    Do you want to invest in an SRI mutual fund that publishes both an investment performance report and an annual impact report?

Next steps

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