How To Invest Your Self-Directed IRA In Socially Responsible Ways

What if you could invest your money in ways that also help achieve positive environmental and social impacts? Now you can — with an investing strategy known as socially responsible investing, or SRI.

Also known as environmental, social and governance (or ESG) investing, this strategy allows you to invest your money in ways that align with your beliefs and values while supporting causes that you believe in. Or you can direct your money away from investments in industries that conflict with your values.

Exploding Popularity

SRI has exploded in popularity in recent years. According to the Forum for Sustainable and Responsible Investment (US SIF), about $3 trillion was invested using one or more sustainable investing strategies in 2010. By 2020, this had risen to more than $17 trillion¹ — or one out of every three dollars in total U.S. assets under professional management.

What’s more, 57 percent of U.S. investors now say that the societal impact of their investments is either somewhat or very important, according to a study conducted by American Century Investments. SRI is especially popular among younger investors, with 65 percent of Millennials saying they’re interested in it, compared to just 49 percent of baby boomers.

This study identifies the following social and environmental causes that are most important to investors today:

• Animal and human rights issues
• Climate change
• Healthcare/disease prevention and cures
• Environment/sustainability
• Improved education
• Mitigating poverty
• Gender equality
• Alignment with religious principles

Demographic trends could make SRI even more popular in the future. In a decade, Millennials are expected to hold five times more wealth than they do now. And Millennials and members of Generation Z are going to be the recipients of the greatest wealth transfer in history in the coming decades from their baby boomer parents: more than $68 trillion.

Does SRI Limit Investment Returns?

A big question many investors have about SRI is whether it limits potential investment returns. Several recent studies indicate that it doesn’t. For example, according to Morgan Stanley, SRI funds that have been in existence for at least seven years had higher or equal returns to traditional funds 64 percent of the time.²

A whitepaper published by the Morgan Stanley Institute for Sustainable Investing stated there is “no financial trade-off in the returns of sustainable funds compared to traditional funds, and they demonstrate lower downside risk.” During periods of extreme volatility, there is “strong statistical evidence that sustainable funds are more stable.”³

How to Practice SRI

There are several different ways to practice socially responsible investing. The most obvious is to invest in companies whose practices align with your values. This strategy positively screens for these kinds of businesses using ESG criteria. Since everyone has different values, these criteria will be different for each investor.

Another way is by negative screening, or not investing in businesses involved in things that go against your core values.

Yet another way to practice SRI is to invest in lenders that direct capital to underserved communities, either in the U.S. or abroad. These might include lenders that make low-interest loans to micro businesses in underdeveloped parts of the U.S. or emerging market nations.

SRI and Self-Directed IRAs

Anyone can practice socially responsible investing, including self-directed IRA owners. In fact, self-directed IRAs are a great vehicle for aligning your investment dollars with your core values since they open up a wider universe to invest for a better future.

_{The information provided in this article is educational content and not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.}