04 May How can we invest in ESG or socially responsible companies?

Q. My college junior would like to start investing his earnings in a Roth IRA, but he wants to stick to socially responsible companies. Is he better off with a mutual fund that does this, or choose whatever companies he supports?
— Dad

A. It’s an admirable goal.

There are several ways to invest in a socially responsible manner, or looking at ESG, which considers a company’s environmental, social and governance practices.

One strategy is to invest in individual companies, said Michael Green, a certified financial planner with GYL Financial Synergies in Parsippany.

“Your college junior could research and select individual companies that align with his social values and invest in them directly,” Green said. “This approach would give him complete control over the companies he invests in, but depending on the amount available to invest, it may be challenging for him to diversify his portfolio, and the performance of individual stocks can be volatile.”

Or, he could invest in a mutual fund or exchange-traded fund (ETF) that focuses on socially responsible investing.

“These funds are professionally managed and invest in a portfolio of companies that meet certain environmental, social, and governance criteria. Investing in a fund would allow your college junior to purchase a diversified portfolio, reducing his overall risk,” he said. “However, he would be relying on the fund manager to select companies that align with his values.”

If he wants some additional help, he could consider a robo-advisor, he said.

“Robo-advisors are digital platforms that use algorithms to manage portfolios based on the investor’s goals, risk tolerance, and other preferences,” he said. “Some robo-advisors offer socially responsible portfolios that invest in a mix of funds and individual stocks that meet certain criteria.”

Ultimately, the decision of whether to invest in individual companies or a socially responsible mutual fund will depend on your college junior’s preferences, level of investment knowledge, and time to learn and research, Greens aid.

“If he is comfortable doing his own research and has a strong conviction about the companies he wants to support, he may prefer to invest in individual stocks,” he said. “However, if he prefers to rely on a professional fund manager or prefers a more diversified portfolio, he may want to consider a mutual fund or ETF.”

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This story was originally published May 4, 2023.

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