Socially responsible investing what millennials want in their 401(k)s electricity journal

Instead, a menu of investments broken down by social causes and environmental friendliness — so-called socially responsible investments, or SRIs — is what attracts them. In fact, Americans in their 20s and 30s are twice as likely as the overall investor population to put their money in companies targeting SRIs, according to Morgan Stanley’s Institute for Sustainable Investing’s 2017 Sustainable Signals report.

It’s a strategy that aims to deliver competitive returns while trying to bring about social, environmental and workplace change. It also goes by the names "ethical investing," "green investing," "impact investing" and "values-based investing."

Millennial interest in SRIs is having an effect: At the end of 2017, there were 234 mutual funds and exchange traded funds (ETFs) that invested in funds that were screened for environmental, social and governance factors, according to fund-tracker Morningstar. That’s more than double the funds offered in 2012. Assets in these funds have risen 142% since then to $100.2 billion, Morningstar says.

"The assets that go into the socially responsible portfolios have gone through a screening process to make sure they meet the requirements of a particular fund," says Michael Katchen, 30, co-founder at Wealthsimple, a Toronto-based online investment manager that offers broadly diversified socially responsible portfolios that include stocks and bonds as well as foreign investments.

Nearly nine of 10 Millennials (86%) said they are interested in SRI or sustainable investing, vs. 75% of the total population, the Morgan Stanley study found. And when it comes to retirement, 90% of this generation wants sustainable investing options as part of their 401(k) plans, the survey found.

This part of the portfolio is made up of U.S. stocks that leading index provider MSCI says have "positive environmental, social and governance characteristics." Wealthsimple has chosen the iShares MSCI KLD 400 Social ETF, which consists of a broad range of companies that have passed MSCI’s screening process. That rules out companies in businesses involved with alcohol, tobacco, gambling, civilian firearms, military weapons and adult entertainment, according to the fund’s prospectus. Companies in the fund’s top 10 holdings include Microsoft, Facebook, Procter & Gamble and Walt Disney. Gender diversity (7.8%)

This strategy allows Millennials to invest with a so-called "gender lens," or investing in companies that support women’s advancement in the workplace. That can mean more women on the board of directors and more in top executive positions, such as senior VP or higher. The SPDR SSGA Gender Diversity Index ETF tracks U.S. companies that are "leaders in advancing women through gender diversity on their boards of directors and in management," according to its summary prospectus. Companies that don’t have at least one woman on their board or as CEO don’t make it into the fund. Local initiatives (20.3%)

The PowerShares Taxable Municipal Bond Portfolio ETF gives Millennials a chance to both spread out their portfolio risk with bonds issued by local and state municipalities, as well as helping to fund and invest in environmentally friendly projects. These types of bonds pay for improvements and upgrades for projects involving water systems, transportation, power generation and land conservation. Affordable housing (29.7%)

Buying a home is a big investment and getting a mortgage is a challenging exercise for many Americans. Another fixed-income investment, the iShares GNMA Bond ETF, allows Millennials to "promote affordable housing" by investing in residential mortgage-backed bonds that are issued by the U.S. government.

Despite critics who say this type of investing results in less robust returns than more traditional investment strategies, reams of research, including a analysis of academic research on the topic by Morningstar, and a separate analysis by Nuveen Investments last July, concluded that sustainable investing does not have negative effect on performance.

Since its 1990 inception, for example, the MSCI KLD 400 Social Index (formerly the Domini 400 Social Index), has posted slightly better returns than the Standard & Poor’s 500, a broad index of stocks from the largest U.S. companies by market value.