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Is Socially Responsible Investing on the Rise?

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Under the right circumstances, socially responsible investments may be a good move for your portfolio.

The investment world is warming to the concept of socially responsible investing (SRI). That means choosing stocks that reflect your values, regardless of whether they fatten your retirement pot. As it turns out, however, your retirement pot will probably do just fine. Multiple studies show that indexes of "responsible" stocks perform at least as well as the total market over the long term.

In some cases, they do better. For example, a company that improves its energy efficiency might bring those savings down to the bottom line—which could raise its stock price, too. By contrast, the stock of a company caught dumping toxic waste is going to be hammered.

SRI, also called sustainable investing, seeks out companies rated high for "ESG." That means good environmental stewardship; socially fair behavior toward employees, customers, and overseas suppliers; and sound corporate governance. In a 2014 report, more than 1 out of 6 dollars under professional management in the U.S. were invested by following SRI strategies, according to the Forum for Sustainable and Responsible Investment. Of the blue-chip companies in Standard & Poor's 500 stock index, 81 percent published "sustainability reports" last year, compared with fewer than 20 percent in 2011.

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Investments Abound

Morningstar, an investment research company, tracks 207 stock and bond mutual funds devoted to ESG securities. These funds vary in their approach. Some lean negative—no companies involved with tobacco, liquor, gambling, weapons, nuclear or perhaps fossil fuels. Others focus more on finding companies with a positive impact—say, clean energy or improved waste-management systems. Check them online to see if their goals mesh with yours.

For the broadest and lowest-cost exposure to all types of ESG stocks, consider no-load funds (which have no sales charge) that follow an ESG index. Among them: Vanguard's FTSE Social Index Fund, Northern Trust's Global Sustainability Index Fund, and exchange-traded funds (mutual funds that trade like stocks) iShares' MSCI KLD 400 and MSCI USA ESG Select. TIAA-CREF offers four low-cost, actively managed social funds, including a bond fund. Pax World fund group (with higher costs) offers 10.

If you don't want to bet the farm on ESG, you might use it for your core investments, then branch out to one or two other funds whose portfolios look pretty clean. Morningstar has rated some 20,000 stock and bond mutual funds, based on the sustainability of the securities they chose to buy. Those containing the highest mix of ESG stocks get five globes, and those with the least get just one, says Jon Hale, head of Morningstar's sustainability research. You can check the rating of any fund that interests you at (it's free).

Some financial advisers tell clients that sustainable investing can't turn out well because it limits your investment choice. That's old-style thinking.

Jane Bryant Quinn is a personal finance expert and author of How to Make Your Money Last.

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