Making money is the primary goal for most investors, but it doesn’t have to be your only goal. Building a socially conscious portfolio can generate you a nice profit while also helping to make the world a better place.

What is socially responsible investing?

Socially responsible investing (SRI) means choosing your investments based on your moral and ethical beliefs.

For example, if you believe that tobacco companies are unethical, you would refrain from buying stocks or bonds issued by those companies.

Although socially responsible investing has been around as a concept for decades, it’s really taken off in the last few years. One out of every six professionally managed dollars is invested based on an SRI strategy nowadays. As a result, the number of SRI-based mutual funds has increased dramatically.

Assessing SRI funds

One of the biggest concerns in choosing an SRI-based fund is that the fund manager’s idea of what qualifies as a socially responsible investment may not agree with yours. Before investing in any SRI fund, take a look at the fund prospectus and the list of companies it’s chosen to invest in, so that you’ll have a clear idea of the direction the fund is likely to take.

For example, many SRI funds shun tobacco and fossil-fuel stocks, but may or may not care about how companies treat their employees or whether they’re law-abiding. The fund prospectus should indicate which criteria are used to pick its stocks. You can also check the fund’s ESG (environmental, social, and corporate governance) rating to see how it ranks in the qualities that are most important to you. Most, if not all, of the major investment research companies include an ESG rating for the funds they assess.

Ethical issues aren’t the only yardstick you should use when choosing an SRI fund. It’s also important to study the factors that relate to the fund’s performance — after all, socially responsible investing shouldn’t bar you from making a tidy profit on your investments. In particular, look at the fund’s past performance, fees and expense ratios, and risk rating, and consider how the fund fits into your overall portfolio.

SRI funds to consider

One of the biggest funds in the SRI space is Vanguard FTSE Social Index Fund Investor Shares (NASDAQMUTFUND:VFTSX). This large-cap fund has the advantage of being passively managed, meaning that fees and transaction-related taxes will typically be much lower than for a similar actively managed fund. It seeks to track the FTSE4Good U.S. Select Index, which picks stocks based on ESG criteria.

The fund is large, with 434 holdings. This helps to spread out risk, but it also increases the odds that one or more of the included stocks won’t meet a specific investor’s criteria for SRI. For example, while the fund doesn’t include coal-related stocks, it does own oil stocks, including ConocoPhillips and Occidental Petroleum Corp.

The Parnassus Endeavor Fund (NASDAQMUTFUND:PARWX) is another large-cap fund, but it has a mere 30 or so holdings, making it far less diversified than the larger Vanguard fund. The Endeavor Fund chooses companies that “offer outstanding workplaces” and are not in any way involved with fossil-fuel extraction or processing.

Importantly, however, Parnassus’ idea of “outstanding workplaces” may not jibe with some investors. As of this writing, for instance, the fund owns shares of Wells Fargo, a company that’s been through several recent scandals due to the pressure it puts on its sales personnel that has resulted in unethical behavior.

Socially responsible investing isn’t limited to stocks these days: If you’re looking for an SRI bond fund, consider the TIAA-CREF Social Choice Bond Fund (NASDAQMUTFUND:TSBIX). Like the stock funds, this fund picks its bonds based on ESG criteria and aims to keep at least 80% of its assets in investment-grade bonds, including some Treasury securities. This fund doesn’t bar fossil-fuel companies; as of this writing it owns bonds issued by National Oilwell Varco.

With over 200 SRI mutual funds in existence, there’s bound to be one out there that fits your preferences and portfolio. All you have to do is look.

— Wendy Connick

[ad#fool]

Source: Motley Fool