From Screening Out to Speaking Up

For many years, socially responsible investing was relatively easy to explain: investors identified companies or industries they did not want to support and removed them from their portfolios.

Tobacco, weapons, gambling, fossil fuels, and companies operating in objectionable regimes were common exclusions. The philosophy was straightforward—if a company conflicted with your values, you did not own it.

That approach still exists, but socially responsible investing has changed significantly.

Today, investors have more choices, lower-cost funds, more ETFs, and a much wider range of strategies. Perhaps the biggest change is philosophical: some responsible-investing funds no longer focus primarily on avoiding companies. Instead, they remain invested and use ownership rights to try to influence corporate behavior.

The Traditional Approach: Screening Companies Out

The traditional form of socially responsible investing is known as negative screening.

An investor starts with a broad investment universe and removes companies or industries that conflict with certain values.

Examples might include:

• Tobacco
• Weapons
• Gambling
• Fossil fuels
• Companies with certain labor, environmental, or governance practices

This approach has an obvious benefit: it is easy to understand.

If an investor does not want to own fossil-fuel producers, a fossil-fuel-free portfolio can exclude those companies.

However, screening also creates challenges. Removing entire industries can change a portfolio’s risk and return characteristics. It can also become difficult to decide exactly where to draw the line.

For example, should a utility company that still uses coal but is investing heavily in renewable energy be excluded? What about a manufacturer that receives only a small portion of its revenue from military contracts?

There is also a larger philosophical question: when an investor sells shares of a company, someone else buys them. Divestment may send a message, but the investor also gives up the voting rights attached to those shares.

That realization helped create a very different approach.

The Rise of Shareholder Advocacy

A newer philosophy asks a different question:

Instead of asking, “What companies should I refuse to own?”

investors may ask:

“Where can my ownership help influence change?”

Shareholders have important rights. Depending on the investment, they may be able to vote on:

• Directors
• Executive compensation
• Shareholder proposals
• Environmental policies
• Corporate governance
• Other management issues

Funds that emphasize these rights are sometimes described as practicing shareholder advocacy, active ownership, stewardship, or shareholder engagement.

Rather than selling a company because of a problem, an engagement-oriented investor may stay invested and use proxy voting, shareholder resolutions, and direct conversations with management to encourage change.

This represents a major shift in socially responsible investing.

The traditional investor might say:

“I don’t want to own this company.”

The engagement-oriented investor might instead say:

“I want to own enough of this company to have a voice.”

A Different Kind of Responsible Fund

One example of this philosophy is the TCW Transform 500 ETF, ticker symbol VOTE.

Unlike many traditional socially responsible funds, VOTE does not primarily distinguish itself by excluding large portions of the market.

Its portfolio resembles a broad U.S. large-cap index. What makes the strategy different is how the fund uses its position as a shareholder.

The emphasis is on active ownership, including proxy voting and engagement with corporate management.

This illustrates an important point for investors:

Two funds may both be marketed as responsible or sustainable investments while using completely different strategies.

One may avoid certain companies entirely.

Another may own many of those same companies but actively vote and advocate for changes in their behavior.

Neither approach is automatically better. They reflect different philosophies about how investors can create change.

ETFs Have Changed the SRI Landscape

Another major change has been the growth of exchange-traded funds.

Historically, mutual funds dominated socially responsible investing, many of which were actively managed and relatively expensive.

Today, investors can choose from a much larger selection of socially responsible and sustainable ETFs.

ETFs can provide several advantages, including:

• Lower expense ratios
• Daily holdings transparency
• Broad diversification
• Tax efficiency
• Easy trading through brokerage accounts

The ETF structure has also worked well with shareholder-engagement strategies.

A broadly diversified ETF may own hundreds of companies. Rather than excluding large portions of the market, the fund can remain invested and use its votes across a wide range of companies.

Responsible Investing Has Become Less Expensive

One historical criticism of socially responsible investing was cost.

Specialized research, smaller funds, and active management often resulted in higher expense ratios.

That gap has narrowed considerably.

Today, investors can find sustainable and responsible-investing funds with fees that are competitive with traditional index funds.

This means investors may no longer have to choose between keeping costs low and incorporating their values into their portfolios.

However, costs still vary significantly.

Specialized thematic funds—such as funds focused entirely on clean energy or another narrow theme—may still carry higher expenses than broad-market index funds.

Investors should therefore evaluate both the strategy and the cost.

There Are More Strategies Than Ever

One of the biggest changes in responsible investing is simply the number of choices available.

Modern SRI can include several different approaches.

Screening

Funds exclude companies or industries that conflict with specific values.

Examples include fossil-fuel-free, tobacco-free, weapons-free, or faith-based portfolios.

ESG Integration

Funds may evaluate environmental, social, and governance factors and give greater weight to companies with stronger scores.

Shareholder Advocacy

Funds may own a broad range of companies but actively vote proxies and engage management.

Thematic Investing

Investors may focus directly on companies involved in specific solutions, such as:

• Renewable energy
• Clean water
• Sustainable agriculture
• Environmental technology

Impact Investing

Some investors seek measurable social or environmental outcomes alongside financial returns.

These investments may exist in either public or private markets.

Community Investing: A Different Approach

A third major category operates somewhat outside the traditional stock and bond markets: community investing.

Community investing directs money toward underserved communities and projects.

Examples may include:

• Affordable housing
• Small businesses
• Community healthcare
• Education
• Microfinance
• Renewable-energy projects

Community development financial institutions, commonly called CDFIs, are one example.

Investors may also have access to community investment notes or similar fixed-income investments that finance socially focused projects.

These investments can provide a more direct connection between an investor’s money and a particular social outcome.

However, investors should understand that these products may have different risks, liquidity restrictions, and protections than traditional bank deposits or publicly traded investments.

The ESG Backlash Changed the Language

Responsible investing has also become increasingly controversial.

In recent years, the term ESG has faced criticism from multiple directions.

Some critics argue that ESG investing prioritizes political or social objectives over investment returns. Others criticize the industry for greenwashing—marketing funds as sustainable even when their holdings or voting practices do not appear meaningfully different from conventional investments.

As a result, some investment firms have changed how they describe these strategies.

Instead of emphasizing terms such as “ESG” or “values-based investing,” managers may increasingly discuss environmental or governance issues as part of broader risk management.

For investors, the lesson is important:

Do not rely solely on a fund’s name.

A fund labeled “sustainable,” “responsible,” or “ESG” may follow a very different strategy from another fund using similar language.

Look at What a Fund Holds—and What It Does

When evaluating a socially responsible investment, investors should consider two separate questions.

First:

What does the fund own?

Does it exclude certain sectors? Does it favor companies with higher ESG scores? Does it focus on a specific theme?

Second:

What does the fund do as an owner?

How does it vote proxies? Does it submit shareholder proposals? Does it engage directly with management?

This distinction has become increasingly important.

At AIO Financial, for example, we use tools such as YourStake to help evaluate not only the holdings inside a portfolio, but also the level of engagement and values alignment behind those investments.

The goal is to look beyond marketing labels and understand what a fund is actually doing.

The Bottom Line

Socially responsible investing is no longer simply about avoiding companies you disagree with.

Investors today can express their values in several different ways.

They can:

• Refuse to own certain companies
• Favor companies with stronger environmental or social characteristics
• Remain shareholders and use their voting rights to push for change
• Invest directly in themes or solutions they support
• Direct capital toward underserved communities

The growth of ETFs, lower investment costs, and the development of shareholder-engagement strategies have dramatically expanded choices.

Ultimately, responsible investing today is less about finding a fund with the right label and more about understanding the strategy behind it.

Sometimes aligning your portfolio with your values means walking away.

Other times, it may mean staying invested—and speaking up.

This material is provided for general educational and informational purposes only. It does not constitute investment, tax, or legal advice, nor a recommendation or solicitation to buy or sell any security or adopt any investment strategy. All investing involves risk, including the possible loss of principal. Fund holdings, fees, management, and investment strategies can change. Investors should review current fund documents and consult a qualified financial professional regarding their individual circumstances.