How Investing in Socially Responsible Funds are Changing the Game for Millennials - Money Mastery Millennial (2024)

Are you tired of feeling like your investments aren’t aligned with your values?

Do you want to make a difference in the world while also securing your financial future?

Well, you’re in luck because there’s a solution – investing in socially responsible funds.

Socially responsible investing has been on the rise in recent years, particularly among millennials.

A survey by Morgan Stanley found that 86% of millennials are interested in socially responsible investing.

And it’s no surprise why. As a generation, we value social and environmental issues and want to make a positive impact on the world.

But socially responsible investing isn’t just a feel-good trend. It’s also a financially sound strategy.

Studies have shown that socially responsible funds can perform just as well, if not better, than traditional funds.

And with the increasing focus on corporate social responsibility and environmental sustainability, socially responsible investing is poised to continue its growth.

So in this article, we’ll explore how investing in socially responsible funds is changing the game for millennials.

We’ll dive into the benefits of socially responsible funds, how they’re impacting society, and the challenges they still face.

By the end of this post, you’ll understand why socially responsible investing is more than just a trend – it’s the future of investing for millennials.

1. The Rise of Socially Responsible Investing

1.1 History of Socially Responsible Investing

Socially responsible investing (SRI) has its roots in the social justice and environmental movements of the 1960s and 1970s.

Activist investors sought to use their investment dollars to create positive social and environmental change by boycotting companies that engaged in unethical practices and investing in companies that aligned with their values.

Over the years, SRI has evolved to include a wider range of investment strategies, including screening for companies with strong environmental, social, and governance (ESG) practices, impact investing, and community investing.

These strategies have been adopted by investors of all ages, but millennials have been particularly drawn to SRI due to their values and desire for social impact.

1.2 Growing Interest Among Millennials

According to a study by Morgan Stanley, 85% of millennials are interested in sustainable investing, compared to 71% of the general population.

This interest in SRI is driven by several factors, including:

• Values Alignment: Millennials are more likely to prioritize social and environmental issues than previous generations. They want their investments to align with their values and make a positive impact on the world.
• Information Accessibility: With the rise of social media and the internet, it’s easier than ever for millennials to access information about companies’ social and environmental practices. This has made it easier for them to identify companies that align with their values and make informed investment decisions.
• Financial Performance: Contrary to the belief that SRI sacrifices financial returns, studies have shown that SRI funds can perform just as well, if not better, than traditional funds. This has helped to dispel the myth that investing for social impact means sacrificing financial returns.

1.3 Statistics on Millennial Investing Preferences

The Morgan Stanley study also found that:

1. 86% of millennials are interested in sustainable investing, compared to 71% of the general population.
2. Millennials are twice as likely as the general population to invest in companies or funds that target specific social or environmental outcomes.
3. 64% of millennials say they would be more likely to invest in a company that contributes to social or environmental causes.
4. 75% of millennials say they would be more likely to invest in a company if they could see the social or environmental impact of their investment.

Overall, these statistics show that millennials are leading the charge in the shift toward socially responsible investing.

They want their investments to make a positive impact on the world, and they’re willing to invest in companies that align with their values.

As such, SRI is becoming an increasingly important investment strategy for millennials looking to secure their financial futures while making a difference in the world.

2. The Benefits of Socially Responsible Funds for Millennials

2.1 Alignment with Personal Values

One of the biggest benefits of investing in socially responsible funds for millennials is the alignment with their values.

Values-based investing is a strategy that takes into account not only the financial return of an investment but also the social and environmental impact of that investment.

Basically, what value a company is generating on whole. Whether financial or social, both are important measures of value generated.

Values-based investing is becoming increasingly popular among millennials because it allows them to put their money where their values are.

They want to invest in companies that are making a positive impact on the world and avoid companies that engage in unethical practices.

Socially responsible funds make it easier for them to do this by screening for companies that align with their values.

2.1.1 Examples of Social and Environmental Issues Addressed by Socially Responsible Funds

Socially responsible funds address a wide range of social and environmental issues, including:

2.1.1.1 Climate Change

Many socially responsible funds invest in companies that are working to reduce carbon emissions and transition to renewable energy sources.

They also avoid companies that engage in practices that contribute to climate change, such as fossil fuel extraction.

2.1.1.2 Human Rights

Socially responsible funds avoid companies that engage in human rights abuses, such as sweatshop labor or child labor.

They also invest in companies that promote fair labor practices and respect human rights.

2.1.1.3 Diversity and Inclusion

Socially responsible funds invest in companies that have diverse leadership teams and inclusive workplace cultures.

They also avoid companies that engage in discriminatory practices.

2.1.1.4 Animal Welfare

Some socially responsible funds avoid investing in companies that engage in animal testing or factory farming.

They also invest in companies that promote animal welfare and sustainable agriculture.

Overall, socially responsible funds allow millennials to invest in companies that align with their values and make a positive impact on the world.

By investing in socially responsible funds, they can achieve their financial goals while also making a difference in the issues they care about.

2.2 Long-term Financial Performance

2.2.1 Studies on the Financial Performance of Socially Responsible Funds

There is a common misconception that socially responsible funds underperform compared to traditional funds.

However, numerous studies have shown that this is not necessarily the case.

According to a study by Morgan Stanley, sustainable funds showed equal or better performance compared to traditional funds in 64% of cases analyzed.

Another study by Morningstar found that 72% of sustainable funds outperformed their non-sustainable counterparts over the past year.

Furthermore, a study by Harvard Business Review found that companies that prioritize environmental, social, and governance (ESG) issues tend to outperform their peers in the long term.

This suggests that socially responsible funds may have a competitive advantage over traditional funds in terms of long-term financial performance.

2.2.2 Comparison with Traditional Funds

When comparing the financial performance of socially responsible funds to traditional funds, it’s important to note that many factors can influence returns, such as market conditions and the fund’s investment strategy.

However, several studies have found that socially responsible funds can perform just as well, if not better, than traditional funds.

For example, a study by Morningstar found that over the last decade, the MSCI KLD 400 Social Index, which tracks socially responsible companies, has outperformed the S&P 500 by 45 basis points per year.

Another study by Deutsche Bank found that sustainable investing does not come at a financial cost and can be complementary to traditional investment approaches.

The study also found that companies with strong ESG scores had higher profitability and lower volatility.

Overall, the evidence suggests that investing in socially responsible funds can offer comparable or better long-term financial performance compared to traditional funds.

By investing in socially responsible funds, millennials can achieve both their financial and ethical goals.

2.3 Lower Risk and Diversification

2.3.1 Risk Management in Socially Responsible Funds

Socially responsible funds often employ a variety of risk management strategies to help mitigate potential risks.

One common strategy is to invest in companies with strong environmental, social, and governance (ESG) practices, which tend to have lower risk profiles.

Additionally, socially responsible funds may avoid investing in companies with high levels of debt or in industries with a history of high volatility.

Another important risk management strategy used by socially responsible funds is active engagement with companies.

Socially responsible funds often engage in shareholder activism, pushing companies to adopt better ESG practices and reduce their exposure to risks such as climate change or human rights violations.

2.3.2 Diversification Opportunities in Socially Responsible Funds

Investing in socially responsible funds can also provide diversification opportunities for millennials.

Socially responsible funds often invest in a variety of sectors and industries, which can help to spread risk across a broad range of investments.

By investing in socially responsible funds, millennials can gain exposure to industries that align with their values, while also diversifying their portfolios.

For example, a study by Morningstar found that socially responsible funds tend to have lower correlations with traditional funds, meaning they can offer diversification benefits to investors.

This is particularly important in times of market volatility when diversification can help to reduce overall portfolio risk.

Overall, socially responsible funds offer millennials the opportunity to invest in a diversified portfolio of companies that align with their values, while also benefiting from lower overall portfolio risk.

By investing in socially responsible funds, millennials can achieve their financial goals while also making a positive impact on the world.

3. How Socially Responsible Funds are Impacting Society

3.1 Corporate Social Responsibility

Corporate social responsibility (CSR) refers to a company’s efforts to operate ethically and sustainably, while also considering the impact of its actions on the environment, society, and the economy.

CSR has become an increasingly important consideration for companies in recent years, as consumers and investors have become more concerned about social and environmental issues.

3.1.1 Examples of Companies Influenced by Socially Responsible Investing

Socially responsible investing has had a significant impact on the way that companies approach CSR.

As investors have demanded more accountability and transparency from companies, many have responded by adopting more sustainable and responsible practices.

For example, in response to pressure from socially responsible investors, many large corporations have implemented policies to reduce their carbon emissions, increase their use of renewable energy, and improve working conditions for their employees.

Companies like Apple, Microsoft, and Google have all made commitments to become carbon-neutral and reduce their impact on the environment.

Socially responsible investing has also influenced the way that companies approach issues like diversity and inclusion.

Investors have pushed companies to adopt more diverse boards and workforces and to take steps to eliminate discrimination and bias in the workplace.

Many companies have responded by implementing policies to promote diversity and inclusion, and by publicly reporting on their progress in these areas.

Overall, socially responsible investing has played an important role in promoting corporate social responsibility and has helped to drive positive change across a range of social and environmental issues.

By investing in socially responsible funds, millennials can play an active role in promoting these efforts and creating a better world for future generations.

3.2 Environmental sustainability

Environmental sustainability refers to the responsible use of natural resources and the protection of the environment for future generations.

It involves practices that promote the preservation of the planet’s natural resources and ecosystems, reduce waste, and mitigate negative impacts on the environment.

3.2.1 Examples of environmentally sustainable companies supported by socially responsible funds

Socially responsible funds invest in companies that prioritize environmental sustainability, such as renewable energy, sustainable agriculture, and eco-friendly products.

Some examples of environmentally sustainable companies supported by socially responsible funds include:

• Tesla: A leading electric vehicle company that focuses on reducing carbon emissions and promoting renewable energy sources. Socially responsible funds have invested in Tesla due to its commitment to environmental sustainability and its potential for long-term growth.
• Vestas Wind Systems: A Danish company that develops and manufactures wind turbines for renewable energy projects. Socially responsible funds have invested in Vestas due to its commitment to reducing carbon emissions and promoting sustainable energy sources.
• Beyond Meat: A company that produces plant-based meat alternatives, reducing the environmental impact of animal agriculture. Socially responsible funds have invested in Beyond Meat due to its commitment to reducing greenhouse gas emissions and promoting sustainable food production.

These are just a few examples of environmentally sustainable companies that are supported by socially responsible funds.

By investing in these companies, millennials can contribute to the promotion of environmental sustainability while potentially earning a return on their investment.

3.3 Social Justice

Social justice is the concept of promoting equality and fairness in society.

It refers to creating an equitable and just society where everyone has equal rights and opportunities, irrespective of their gender, race, ethnicity, religion, or socio-economic status.

The focus of socially responsible investing is not only on financial returns but also on supporting companies that are making positive contributions to society.

3.3.1 Examples of socially just companies supported by socially responsible funds

Many socially responsible funds focus on investing in companies that promote social justice by supporting human rights, diversity, and inclusivity.

For example, some funds invest in companies that provide fair labor practices, support LGBTQ+ rights, or promote gender equality.

One such company is Salesforce, a cloud-based software company that focuses on social justice and equality.

It has made various social commitments, including paying employees equally and supporting the Black Lives Matter movement.

Another example is Ben & Jerry’s, a socially responsible ice cream company that supports various social justice causes.

The company has committed to sourcing fair-trade ingredients, reducing its carbon footprint, and donating a portion of its profits to social justice organizations.

In addition, it has supported causes such as racial justice and LGBTQ+ rights.

By investing in socially responsible funds, millennials can contribute to promoting social justice and supporting companies that align with their values.

4. Overcoming Challenges in Socially Responsible Investing

4.1 Limited investment options

As socially responsible investing gains popularity among millennials, one challenge that remains is the limited investment options available.

In the past, socially responsible investing was associated with lower financial returns, which led to a lack of interest from investors and a limited supply of socially responsible investment options.

However, as the financial performance of socially responsible funds has improved, more investors are seeking these options, leading to an increase in demand.

While the number of socially responsible funds has grown, it is still limited compared to traditional investment options.

This is because not all companies are committed to social responsibility, and some industries are difficult to invest in while maintaining ethical standards.

Additionally, some socially responsible funds may have higher expense ratios due to the extra research and analysis required to screen for ethical investments.

One potential solution for expanding investment options is for more companies to adopt socially responsible practices.

As more companies commit to environmental sustainability, social justice, and corporate social responsibility, more investment options will become available.

Additionally, as more investors demand socially responsible options, fund managers may be incentivized to create new funds to meet that demand.

Another potential solution is for investors to use their voices to push companies to adopt socially responsible practices.

Shareholder advocacy, in which investors use their ownership of company shares to advocate for change, has been successful in influencing company behavior in the past.

As more investors prioritize social responsibility in their investments, they may use their shareholder power to push for more ethical business practices.

Despite the limited investment options, the growing demand for socially responsible funds is likely to lead to more options becoming available in the future.

As millennials continue to push for more socially responsible investments, the investment industry will have to adapt to meet that demand.

4.2 Higher fees

Socially responsible investing often involves higher fees than traditional investing.

This is partly due to the extra research required to ensure that companies meet certain environmental, social, and governance (ESG) criteria.

The fees can also be higher because socially responsible funds are often smaller and more specialized than traditional funds.

According to a report by Morningstar, the median expense ratio for U.S. mutual funds and exchange-traded funds (ETFs) in 2020 was 0.44%.

In comparison, the median expense ratio for sustainable funds was 0.57%, which is 30% higher.

However, it’s important to note that this is only a median, and fees can vary widely between different funds.

Despite the higher fees, many millennials are willing to pay extra for socially responsible investing.

In fact, according to a survey by Morgan Stanley, 86% of millennials said they are interested in sustainable investing, even if it means lower returns or higher fees.

There are several potential solutions for reducing fees in socially responsible investing.

One option is to choose ETFs over mutual funds, as ETFs typically have lower expense ratios.

Another option is to choose larger funds, which can take advantage of economies of scale to reduce fees.

Finally, investors can shop around and compare fees between different socially responsible funds to find the most cost-effective options.

It’s also worth noting that while fees are an important consideration, they shouldn’t be the only factor when choosing a socially responsible fund.

It’s important to consider the fund’s investment philosophy, performance history, and ESG criteria, as well as the fees, to make an informed investment decision.

4.3 Lack of regulation

Socially responsible investing has been on the rise among millennials, but it still faces several challenges.

One of the biggest issues is the lack of regulation, which makes it difficult for investors to know if their investments align with their values.

Let’s explore this challenge in more detail.

4.3.1 Regulatory Issues in Socially Responsible Investing

The lack of regulation in socially responsible investing means that companies can make claims about their environmental, social, and governance (ESG) practices without being held accountable.

This can lead to greenwashing, where companies make misleading claims about their sustainability practices to attract socially responsible investors.

Additionally, there is no standard definition of what constitutes socially responsible investing, making it difficult for investors to compare different funds.

4.3.2 Potential Solutions for Increasing Regulation

To address the lack of regulation, some investors are calling for standardized ESG metrics and reporting frameworks.

This would allow investors to compare the ESG performance of different companies and funds.

In 2020, the European Union introduced a sustainable finance disclosure regulation that requires financial market participants to disclose how ESG factors are integrated into their investment decisions.

This regulation is expected to become a global standard and increase transparency and accountability in socially responsible investing.

Another solution is to increase the oversight of socially responsible funds.

Regulators could require funds to disclose more information about their investment strategies and the ESG metrics they use.

This would allow investors to make more informed decisions about where to invest their money.

In addition, investors can do their due diligence by researching the funds they are interested in and the companies in which they invest.

They can look for funds that are certified by third-party organizations such as the Global Impact Investing Network (GIIN) or the Forum for Sustainable and Responsible Investment (US SIF).

These organizations set standards for socially responsible investing and provide certification for funds that meet those standards.

In conclusion, the lack of regulation in socially responsible investing is a challenge that needs to be addressed.

While there are some potential solutions, investors can also take steps to ensure that they are investing in funds that align with their values.

By doing their research and choosing certified funds, millennials can help create a more sustainable and socially responsible investment landscape.

Bottom Line…

In conclusion, socially responsible funds are changing the game for millennials when it comes to investing.

With a growing concern for environmental sustainability, social justice, and corporate responsibility, millennials are increasingly interested in investing their money in a way that aligns with their values.

The benefits of socially responsible funds are clear – they offer the potential for strong long-term financial performance, lower risk and diversification, and the ability to make a positive impact on society.

While there are still challenges to overcome in terms of limited investment options, higher fees, and lack of regulation, progress is being made in the industry.

The amount of assets invested in socially responsible funds has increased dramatically in recent years, and there are now more investment options available than ever before.

As millennials continue to become the largest generation in the workforce and accumulate wealth, their interest in socially responsible investing will only continue to grow.

Investing in socially responsible funds is not only a smart financial decision, but it also allows individuals to make a positive impact on the world around them.

With the potential for both financial and social returns, socially responsible investing is changing the game for millennials and the investment industry as a whole.