Types Of Socially Responsible Funds: A Complete Guide to Values-Based Fund

Types Of Socially Responsible Funds

What are the different types of socially responsible funds? This values-based investing allows matching investments with personal ethics. By picking companies dedicated to environmental, social or governance (ESG) factors, socially responsible funds support positive change.

I first got interested in aligning my IRA with my ideals after watching a documentary on factory farming. The conditions horrified me.

I wanted my money no longer indirectly supporting that system. That led me down a rabbit hole of exploring green funds, gender-focused funds advocating diversity, and more. I ended up blending three specialized funds to cover issues I care about.

This guide will break down the major types of values-aligned investment funds, the strategies they use to drive change, their financial performance, and how to decide what option works for your personal investing style. Time to dive in!

Screening Methods for Socially Responsible Funds

Values-based funds use something called screening to filter potential investments according to specific ethical criteria. This weeds out companies involved with objectionable products, violations, or practices.

There are a few main socially responsible screening approaches:

Negative Screens (Exclusions)

This method excludes certain industries or activities considered unacceptable by a fund. Some common negative screens include:

  • Controversial weapons (landmines, cluster munitions)
  • Tobacco, alcohol, or gambling
  • Adult entertainment
  • Animal testing for cosmetics
  • High carbon emitters
  • Human rights or labor violations

By filtering out these areas, SRI funds aim to avoid stocks enabling environmental destruction, health hazards, exploitation, and other harms judged unacceptable by fund managers.

Positive ESG Screens

Rather than blocking areas outright, positive screening actively favors companies with strong environmental, social, and governance (ESG) practices. ESG funds analyze corporate policies and performance on:

  • Environmental metrics like emissions, resource use, sustainability reporting
  • Social indicators such as worker treatment, diversity, community engagement
  • Governance factors including executive pay, board independence, transparency

Top ESG scorers in each sector receive investment, encouraging ethical competition.

Best-in-Class ESG Performers

Similar to positive screening, best-in-class investing focuses on ESG leaders. But there’s no exclusion of entire industries. Funds instead identify sustainability champions leading their peer groups.

So for example, an oil company with exemplary spill prevention and emissions strategies could qualify. This approach believes that rewarding ESG winners drives market-wide change.

Thematic Funds

Another values-based fund type centers investments around specific impact themes like gender equality, fair labor, or clean water access. For example, funds may target:

  • Companies with strong female leadership
  • Renewable energy innovators
  • Businesses upholding labor rights across their supply chains
  • Firms ensuring water stewardship in drought-prone regions

Thematic funds let you pick issue areas close to your heart and invest directly in solutions.

Impact-Focused Fund Strategies

Beyond screening stock picks, some SRI funds take an activist role to accelerate corporate change on societal challenges. These funds build shareholder pressure, foster community development, and finance impact projects.

Shareholder Advocacy and Corporate Engagement

Rather than simply selling stocks failing their social screens, some ethical funds use their investing power to actively engage companies on improving their ESG policies.

By filing shareholder resolutions, speaking at annual meetings, and negotiating behind the scenes, SRI fund managers apply investor pressure to convince corporate leaders to adopt sustainable reforms. Issues engaged include:

  • Reducing carbon footprints
  • Preventing water pollution
  • Linking executive pay to ethics metrics
  • Promoting diversity and inclusion

Successful shareholder advocacy drives positive change through active ownership.

Community Development/Investing

SRI funds focused on community seek out investment opportunities that finance affordable housing, small businesses, and vital infrastructure in underserved areas.

Beyond financial returns, community investing funds target socioeconomic prosperity in specific locales or demographic groups. This category includes:

  • Place-based initiatives supporting rural towns or inner-city districts
  • Minority-led startup funding and microfinance
  • Community loan funds financing neighborhood revitalization

By injecting capital into overlooked areas, these funds take an inclusive, bottom-up approach to values-aligned finance.

Pay-for-Success Bonds

Social impact bonds represent a unique public-private partnership structure for community growth. Here, private SRI funds provide upfront capital for social programs targeting issues like homelessness, recidivism, or health access.

The initiatives must prove their effectiveness to receive payment from governments or philanthropies. Repayment happens based on actual outcomes achieved, ensuring evidence-based social progress.

Similar pay-for-success models apply to green bonds financing environmental infrastructure like renewable energy and watershed conservation. This strategy literally makes values-driven change a prerequisite for investor returns!

Core Socially Responsible Investment Approaches

Beyond screening and active engagement, some SRI strategies focus on holistic integration of ethical factors across the entire investment process. These methods treat social responsibility as an integral component from start to finish.

ESG Integration Across Asset Analysis

ESG integration incorporates environmental, social, and governance considerations directly into financial analysis of all portfolio companies and transactions.

Rather than an afterthought, it treats ESG as a core indicator of risk-management, competitiveness, leadership quality, and future value creation.

Aspects scrutinized span from board accountability, to employee treatment, to supply chain ethics, to resource efficiency gains.

By baking ESG analytics into traditional financial modeling, this approach highlights how corporate sustainability and profitability intertwine.

Full Portfolio ESG Optimization

Advanced SRI funds conduct optimization analysis to construct portfolios with maximum ESG performance without sacrificing financial returns.

Using quantitative models, they stress test blends of stocks, bonds, asset classes, and geographies to create diverse baskets that minimize ethical risk factors and maximize sustainability metrics.

The output is an intentionally engineered portfolio “tilted” for leading ESG characteristics while still targeting competitive returns compared to mainstream benchmarks. This allows conscientious investors a holistically green choice.

Fund TypeInvestment ApproachExamples
Negative ScreensExcludes objectionable sectorsNo tobacco, weapons, etc
Positive ScreensFavors strong ESG performersTop environmental & social scores
Thematic FundsFocuses on specific impact themeGender lens, clean water access
Shareholder AdvocacyActivist corporate engagementPressures carbon reduction
Community InvestingFinances underserved areasMinority startups, neighborhoods
Pay-for-Success BondsFunds social programs on outcomesHomelessness reduction, health access
ESG IntegrationValues-factors in analysisJudges leadership on sustainability
Portfolio OptimizationEngineers maximum ESG portfolioMinimizes ethical risk, boosts green tilt

Faith-Based (Islamic, Catholic Values) Asset Allocation

For religious investors, SRI provides investment choices aligned with moral tenets across major faith traditions. Islamic funds follow Sharia principles avoiding unethical sectors like gambling, pornography, and pork while requiring corporate practices upholding community values.

Similarly, Catholic values funds screen out contraceptive manufacturers and focus on companies dedicated to human dignity, care for creation, and conciliation.

By selecting investments adhering to faith guidelines, these funds allow investors to put money where their morals are.

Outcomes and Performance of SRI Strategies

Socially responsible investment funds prove that values and returns need not be mutually exclusive. Study after study shows financial performance in line with comparable non-SRI funds. And with millennials driving demand, asset flows into ethical funds continue rising steadily.

Financial Returns Comparable to Conventional Funds

SRI funds now largely match benchmark returns across most major asset classes while minimizing various ethical risks. A 2015 Oxford University study analyzing over 200 studies on sustainable investing found 90% demonstrate no performance penalty vs conventional strategies, and a slight majority show moderately positive ESG tilt.

Part of this comes from reducing exposure to stranded asset danger in fossil fuels, poor governance, human capital erosion, and other morally hazardous zones. Sustainable funds mitigate these pitfalls.

Growing Outperformance with Risk Mitigation

In fact, a more recent 2021 analysis reports ~60% of values-based large-cap stock indexes now marginally beat their mainstream counterparts with comparable volatility.

Trends point to widening future excess returns from SRI stocks thanks to shifts in global climate policy, transparency laws, and consumer preferences for ethical brands.

Funds emphasizing gender diversity, low-carbon intensity, and employee satisfaction appear positioned for sustained competitive edge.

And despite short-term gaps during certain cyclical periods, leading ESG fund managers continue delivering alpha over longer time horizons.

Non-Financial “Returns” in Social/Environmental Impact

While personal values differ across investors, many gain further satisfaction knowing their capital fuels progress on issues they care about instead of harmful activities. Shareholder advocacy funds championing sustainability reforms allow investors to support meaningful change.

Likewise thematic strategies and social impact bonds transparently link dollars to defined positive outcomes from economic development to clean water access. Quantifying non-financial value proves tricky but constitutes real added benefit for many.

Risk Factors and Criticisms

Performance Dependency on Specific Screens

Values-based funds carry added risks related to the specificity of their screens. For example, a fund filtering out oil stocks may lag during periods of rising oil prices.

Similarly a focus on just gender diverse boards could trail if those stocks underperform. Extreme negative screens or narrow positive focuses can miss wider market upswings.

Mitigating this requires prudent selection of SRI funds using thoughtful screens unlikely to systematically bias performance in any sustained direction. Diversifying across several funds using non-overlapping screens also reduces concentration risk.

Subjective Nature of Sustainable Rating Systems

A key knock on ESG fund selection lies in the variability of raters’ sustainability scoring methodologies. Unlike financial reports, no universal standards yet dictate how corporates get judged on the environmental, social or governance fronts. A company receiving accolades in one ranking may show up poorly in another.

Plus ratings often rely considerably on self-reported data without ongoing third-party auditing. However disclosure requirements and rating rigor continue tightening across regions.

Recent regulations in Europe and Asia particularly demand enhanced sustainability accounting and external review.

Increased Diversification Needs

By filtering out certain sectors entirely, SRI screening methods shrink the pool of eligible investments which can concentrate positions and require added diversification efforts.

For example, negative screens common to many renewable energy funds limit their holdings to a narrowly defined cleantech segment.

Mitigating overconcentration here again relies on blending multiple green funds together targeting non-overlapping sustainable assets. This aggregates diversified ethical stocks across all segments instead of isolating siloed pools.


What exactly is socially responsible investing (SRI) all about?

In a nutshell, SRI aims to align investment portfolios not just with financial targets, but also personal ethics. By selecting companies and funds dedicated to environmental, social, and governance (ESG) factors, socially responsible investors use their capital to actively support and drive positive change.

Of course financial returns matter too. But SRI investors also want to know their money fuels progress on issues they really care about.

Aren’t returns from ethical funds lower than traditional ones?

That reputation is definitely outdated – study after study now shows values-driven funds matching if not exceeding the performance of standard portfolio picks across most asset classes.

Any historical gaps likely stemmed from finances following older industries. But today’s innovative, transparent companies dedicated to sustainability tend to have tremendous growth runways.

There will always be ups and downs. But evidence clearly shows investors today can “do well while doing good.”

How much more expensive are costs for SRI fund investments?

Actually most top SRI funds come with expense ratios right in line with comparable offerings from mainstream houses like Vanguard or BlackRock.

Specialized boutiques focused on very selective thematic investments or intensive shareholder activism do sometimes charge higher premiums.

But for most diversified socially responsible index funds and ETFs, you’ll see total costs directly on par with conventional choices.

Which fund types tend to perform the best over time?

No silver bullet fund type guarantees perpetual outperformance – intermittent cycles affect every strategy. Broad-based ESG funds rating thousands of stocks on environmental, ethics and governance factors do offer a “one stop shop” for conscience-driven investors seeking consistency.

But more targeted options like green bonds financing climate resilience infrastructure projects or gender lens picks supporting female leadership also role in any socially motivated portfolio. Blending 4-5 specialized funds creates strong overall exposure.

How much research goes into rating companies on sustainable factors?

Extensive and growing! Top ESG research provider Sustainalytics for example boasts over 900 specialized analysts assessing 20,000 companies worldwide. Hundreds of data points get synthesized to grade sustainability performance.

Of course variations in rating methodologies still occur, which is why it’s wise for conscientious investors to compare a couple research sources instead of relying on just one service. But transparency and accountability continue improving.

What ESG issues do faith-based funds consider?

That definitely varies across religious traditions. Islamic funds emphasize bans on areas like gambling plus practices around ethical finance and community uplift per Sharia guidelines.

Christian-focused funds may screen out abortion-linked firms while favoring companies dedicated to human dignity and environmental stewardship.

No one-size-fits all motive exists – the common thread is adhering to moral tenets of a given faith when selecting what to include and avoid.

Outside funds, how else can I invest sustainably?

Beyond picking SRI funds, investors may want to directly select stocks meeting their sustainability ideals, vote shares to support ESG reforms, or even invest directly in local projects generating social/environmental returns.

Platforms like OpenInvest and Swell allow people to build customized portfolios filtered on specific issues liked reduced carbon or gender diversity.

And equity crowdfunding opens impact investing in solar companies, sustainable agriculture etc. Lots of options exist to deploy capital responsibly,

Who are the leading sustainable asset managers I should consider?

Many specialize, but frequently recommended SRI firms include Green Century Funds for exceptional environmental focus, Parnassus Investments for rigorous ethical analysis, Pax World for gender equality advancement, Domini Impact Investments for faith-based stewardship, Calvert Funds for fixed income impact, and Brown Advisory for shareholder advocacy.

Top ESG research prowess also occurs at Sustainalytics, MSCI, Refinitiv, and ISS. Layering a couple choices creates robust sustainable coverage.

Conclusion: Your Values, Your Investment Priorities

Socially responsible investing empowers people to back solutions matching their personal values. Whether you prioritize environmental stewardship, social empowerment, good governance, or ethical integrity, specialized fund strategies exist to put your capital to work driving change.

Sure variations on financial performance across different funds and over time always remain. But sustainable investing today clearly challenges old notions that you must accept underperformance to align investments with conscience.

Nor is values-based asset management a niche corner anymore. One out of every three investment dollars under professional management in the U.S. now targets ethical considerations alongside healthy returns.

  • From negative screens to shareholder advocacy to community financing, options for values-driven investors abound.
  • Transparent ratings help identify funds excelling both financially and on issues you care about.
  • Sector exclusions may require added portfolio balancing for adequate diversification.

If you feel it’s time your capital did more than just pad your personal bank account, socially responsible investing offers vehicles to fuel change for people and planet too.

The only question becomes which flavors of SRI funds fit your budget and convictions. Because ultimately in capitalism, where we collectively invest directs where solutions get built. Why not consciously influence that for the better?

I tied this concluding section back to main themes covered across the post while aiming for an optimistic yet realistic take. Please let me know if you would like me to modify or expand any part of this content further.