Socially responsible investing is an ever-changing, fast-growing segment of the investing world, but don't let this prevent you from getting started. Both beginner investors and hedge fund managers can use socially responsible investment techniques to develop a stronger portfolio and unlock higher returns, so there is no better time to get started than now!

Step 1: Identify what is important to you
One of the advantages of socially responsible investing is that each person gets to decide what is important to him or her. For some, this means hand-picking companies that are making positive contributions. For many others, this means avoiding companies in so-called "sin" industries like tobacco, alcohol, gambling, weapons, or even oil. An investor passionate about global warming might only invest in companies that have demonstrated a commitment to using alternative energy and reducing their carbon footprint. Think about what matters to you most.

Step 2: Develop criteria
Based on what you came up with in Step 1, take a few minutes and write down the three to five most important aspects you would like to see in an investment. These criteria can be specific ("has a plan to become carbon neutral by 2025") or general ("has demonstrated its commitment to benefiting all company stakeholders, including employees and suppliers"), although specific criteria will make it easier to judge stocks.

Many socially responsible investors divide such criteria into three categories: environmental, social, and corporate governance. Environmental factors include the company's attitude toward climate change, creation of pollution, or hazardous waste, relative environmental friendliness of products, and progress toward sustainability. Social elements include human rights, workplace diversity, social effects of products (i.e., weapons vs. organic food), and the treatment of all stakeholders in the business. Positive corporate governance signs include excellent employee relations, a progressive corporate structure (separation of CEO and chairman of the board), philanthropy, and reasonable executive compensation. However, do not feel the need to limit your criteria to these categories.

I try to look for companies that:

  • Have demonstrated a commitment to reducing their environmental impact
  • Exhibit positive relations with employees
  • Create products that do not have harmful effects -- ruling out tobacco, alcohol, gambling, and weapons companies
  • Make the world a better place

I can hardly claim that every company I own adheres to all of the above requirements, but having a defined set of guidelines will greatly facilitate building a socially responsible investment portfolio.

Step 3: Research some stocks or funds for your portfolio
Now that you know what you are looking for, it's time to dig in. Every investor has his or her own strategy for finding and researching new stocks. However, you may have to find new sources of information to learn more about each company's corporate responsibility. Luckily, the popularity of socially responsible investing has induced most companies to include a corporate responsibility section on their website. This is a great source to learn about a company's social or environmental initiatives, although you will certainly not get a complete picture. Also, investors can find each company's proxy statement on its Investor Relations page, which helps investors learn about the company's management and attitude toward shareholder resolutions. To start your research, the company's Wikipedia page can often provide a summary of past controversies. (Be mindful, though, that information on Wikipedia is not always accurate.)

To help you get started, I've written articles summarizing my research on three companies -- Apple (Nasdaq: AAPL), Whole Foods (Nasdaq: WFM), and AT&T (NYSE: T) -- that could be investments in a socially responsible portfolio.

  • Apple's products receive spectacular marks on environmental performance. However, the company's dependence on Chinese manufacturing gives pause to some socially responsible investors, as reports have shown very poor labor conditions.
  • Whole Foods' entire business promotes a more sustainable agricultural system, and the company could be a great (if obvious) first choice for a socially responsible investment portfolio.
  • AT&T, a less obvious choice, has come full circle by expanding its cell phone recycling program, along with many other social and environmental programs. However, the company has been marred by privacy scandals in the past, and the presence of conflict minerals taints phones using AT&T and most other electronics companies.

For some other ideas for socially responsible investments, check out Fool analyst Alyce Lomax's Real Money Portfolio.

If you're more interested in a hands-off approach, a socially responsible mutual fund might be better for you. The mutual fund center at SocialFunds.com has information about almost every socially responsible fund out there. Industry leaders like Pax, Calvert, Domini, Parnassus, and Ariel provide several choices for the socially responsible investor. The main problem is finding a fund that aligns with your own criteria. You might be surprised to find what companies a so-called SRI fund actually owns, so be sure to check out its holdings at Morningstar. There is growing evidence that socially responsible mutual funds outperform their conventional peers, as I discuss in my article on SRI performance. 

Like all mutual funds, socially responsible investment funds have fees, so an index fund could be a better choice for the more passive investor. The Calvert Social Index Fund (CISIX) takes the 1,000 largest American companies, then eliminates the 40% that do not pass its screens, although the fund's inclusion of JPMorgan Chase and Bank of America may raise some eyebrows. Praxis has index funds that integrate Christian ideals in their investments, and Vanguard offers its own Social Index (VFTSX) fund that focuses on large- and mid-cap stocks. For many beginner investors looking to create an SRI portfolio, buying mutual or index funds may be a better approach, allowing you to put your guilt-free portfolio on autopilot.

Step 4: Take the leap and invest!
So you've come up with a few companies or funds that meet your socially responsible criteria, and now you're ready to get your feet wet. This is a big step for the first-time investor! To get started, you'll likely want to open an account with a discount brokerage. Check out the The Motley Fools' broker comparison to find one that is right for you. After you pick one, it's time to pull the trigger. You're on your way to creating a portfolio that will make you money and make the world a better place.

Step 5: Monitor your investments and get involved
As with buying any stock, your work is not completely done once you have clicked the "submit trade" button on your brokerage website. Part of being a Foolish investor is checking up on your portfolio to see if your investment theses are still intact; and part of being a Foolish socially responsible investor is making sure your investments live up to your environmental, social, and governance criteria in addition to staying on track financially.

For established investors, this step may require you to go through all of your investments and examine how socially responsible they really are. Inevitably, many of you will face that difficult situation where you learn that your beloved triple-bagger treats employees like dirt or is embroiled in a human rights scandal. These are the decisions that make being a socially responsible investor most challenging, but it's up to you to decide whether you would like to continue profiting from such a business.

The final step is to get involved in the companies you own. Many investors forget that the ticker they own actually entitles them to some decision-making power in a business. Be sure to vote on the resolutions addressed at the company's annual meeting, and support shareholder resolutions that improve how the business is run. By staying involved in the company's operations, you can help guide it to a model that makes socially responsible investors like you happy.

Becoming a socially responsible investor is far less work than you think. If you've always planned on making your portfolio socially responsible, now is a great time to take this step.

To learn more, click one of the links below:

Whole Foods may seem an obvious choice for a socially responsible investment, but do you know all there is to know about the stock's opportunities and risks?  If you're a beginner investor looking to get in on this organic powerhouse, check out our brand-new premium report on Whole Foods.  One of our top analysts will walk you through the must-knows for every Whole Foods investor, and we'll also provide a full year of regular updates to help you monitor your investment. To start learning all you can about the company today, click here.