Socially responsible investing (SRI) selects investments using nonfinancial considerations, especially perceived social or environmental benefits. SRI products commonly appear through ETFs used in robo-advisor portfolios, but no single definition governs the approach. section 4.4.2 section 4.5
SRI indices commonly implement these preferences in three ways:
- Exclusionary indices remove specified businesses, such as fossil-fuel extractors, then weight the remaining stocks using a standard method such as market capitalization. section 4.4.2
- Narrow-focus indices concentrate holdings in companies associated with a particular value, such as clean energy or racial and ethnic diversity in leadership. section 4.4.2
- Tilted indices may exclude selected industries, emphasize stocks with stronger responsibility scores, and constrain tracking error relative to a standard index. section 4.4.2
Environmental, social, and governance (ESG) metrics provide a measurement framework often associated with SRI. Environmental measures include emissions and water use; social measures include labor practices and product safety; governance measures include executive pay, business ethics, and tax transparency. section 4.4.2
Concrete index choices
SPYX illustrates exclusionary SRI by holding S&P 500 stocks while excluding companies that own fossil-fuel reserves. ICLN illustrates a narrow clean-energy focus, while NACP targets companies promoting racial and ethnic diversity in leadership. section 4.4.2
Table 4.6 Examples of ESG factors
| Environmental | Social | Governance |
| Carbon emissions | Labor management, health, and safety | Executive pay |
| Water and land usage | Product safety, privacy, and security | Business ethics |
| Toxic emissions and waste | Community relations | Tax transparency |
| Involvement in renewable energy |
Use the ESG-factor table to compare the environmental, social, and governance attributes that can inform SRI evaluation. section 4.4.2
