Just because an investment fund calls itself socially responsible doesn’t necessarily mean that all its investments fit your definition of companies that are socially responsible. For instance, eight of the 10 largest socially responsible exchange-traded funds (ETFs) include investments in oil exploration and development companies, which draw harsh criticism from environmental activists even though they have invested in some renewable sources. And the iShares MSCI KLD 400 Social ETF, which requires that companies have good environmental, social and corporate governance (ESG) records, owns shares of McDonalds and Nike, both of which have controversial labor practices. Although many of these funds do exclude industries including alcohol, firearms, gambling, nuclear power, pornography and tobacco—and an increasing number also stress “sustainability”—policies vary.

The Securities and Exchange Commission is reportedly checking into the criteria that investment firms use. The inquiry comes at a time when the more than 300 ETFs and mutual funds citing socially responsible guidelines are drawing record inflows, adding more than $20.6 billion in 2019, compared with $2.8 billion in 2015, according to Morningstar Inc.

What to do: Review all holdings of funds you may want to invest in and decide whether you’re willing to accept compromises on your standards, if necessary. The determinations are not always clear-cut. For example, the Vanguard ESG US Stock ETF excludes companies that own oil reserves but still invests in the oil-services company Schlumberger, which says its technological innovations have positively influenced sustainable practices in exploration. And one of the Vanguard FTSE Social Index Fund’s top holdings is Johnson & Johnson—which boasts of its commitment to sustainable development principles, including environmental health, but also is facing hundreds of millions of dollars in payments over charges that it helped fuel the opioid crisis.

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