Socially responsible investing, or SRI, goes by a lot of names. You can refer to it as “investing ethically.” Or you may call it sustainable investing, or even impact investing.

It’s a different approach from traditional investing strategies. In the past, most investors didn’t consider the social impact the companies who received their investments made. They just wanted a good return.

Whatever term fits best for you, the idea behind it all is the same: you look at important factors to help you determine which companies to invest in to support those that will create a positive impact on society.

This might be something to explore if you want to make sure the money you invest in the market goes to companies most likely to provide benefits to the environment or society in some way.

And if you’re interested, you’re not alone. Socially responsible investing grew by 33 percent between 2014 and 2016. 22% of the $40.3 trillion in total tracked assets under management is part of SRI, too.

But “positive impact for society” can mean a lot of different things, depending on who you talk to. That makes it hard to nail down a precise definition of what counts as SRI and what doesn’t.

Understanding the Nuances of Socially Responsible Investing

Some funds categorized as “ethical” refuse to invest in companies making profits from things like alcohol, tobacco, or firearms. Other funds evaluate companies to include or exclude on a more subjective basis.

One of the portfolio managers of Parnassus Core Equity Fund (PRBLX), for example, explains that they don’t invest in Wal-Mart because they hold the corporation at fault for ruining Main Street in small towns of America. They pass on Coca-Cola, too, because they don’t believe the company provides a healthy product for society.

These are decisions made by individual funds and the people that manage them. And it can get complicated — and expensive.

Some SRI funds will include corporations that other funds disavow. Parnassus is one of the largest and best-performing mutual funds dedicated to ethical investments. But it’s not the only one.

Vanguard’s FTSE Social Index Fund (VFTSX) also aims to allow investors to invest ethically. But it contains companies that Parnassus refuses to invest in. Is one fund more ethical than the other? That’s a matter of interpretation.

Plus, all this actively vetting companies and excluding some while including others adds to the work of actually managing the fund.

That matters because the cost is usually passed on to individual investors through the fund’s expense ratios — and funds branded as “SRI” tend to carry higher expenses than other mutual funds that follow traditional indices.

Combine Investing Ethically with Investing Wisely

Considering all this, you might want to start investing ethically by asking yourself: what do you believe? What are your values, and what do you think is ethical? In other words, start by understanding your definition of socially responsible investing.

Literally putting your money where your mouth is and investing ethically or in a way that represents your values in areas beyond finances is admirable. It’s a way to talk the talk and walk the walk.

But that doesn’t mean you should engage in socially responsible investing willy-nilly (even after you define what it means to you). You still need a plan. And you still need to consider how your ethical investments fit into your overall financial picture.

Here’s what to keep in mind:

  • You still need a diversified portfolio. You can’t do anyone, from your neighbor to all of society, any good if you lose all of your investments because you placed your money with a single source. You need to create balance in your portfolio and avoid putting all your eggs in one basket (even if that basket is made by well-paid workers using sustainably sourced materials). The good news is that ethical investments come across all asset classes. If you’re determined to keep all your money in socially responsible funds, at least manage your risk by spreading your investments over a range of different securities.
  • You need to keep fees in check. Again, because of the added work in managing a socially-responsible fund, the expense ratios on these mutual funds tend to run higher than on index-tracking ETFs.
  • You should develop realistic expectations. Keep in mind that a socially responsible mutual fund is probably an actively managed one — and research shows actively managed funds usually don’t beat their benchmarks. You may need to accept the potential tradeoff of earning less than a passively managed index fund to invest in what you believe in.

Ultimately, that may be the most important thing to understand about socially responsible investing if you’re just now exploring this possibility: you may pay more for your investments to return less.

Working this into your investment strategy requires more thought, planning, and time than it would if you were simply looking for the best return at the lowest cost.

But choosing where to devote your financial resources is an extremely personal decision. You can reach your own goals while acting in a way you feel is ethical — and that starts with defining what ethical truly means to you.