What is the benefit of socially responsible investment?
Socially responsible investing: incorporating personal values with investment decisions
Socially responsible investing provides a mechanism for investors to align personal
values with investment objectives.
Environmental, social, and governance (ESG) factors can be a key way to assess the
sustainability and social impact of an investment in a company or business.
In general, ESG investing can be approached in 3 ways: Actively include companies
based on ESG factors, exclude companies that violate certain ESG factors, or take a
blended approach.
What is socially responsible investing?
At its most basic, socially responsible investing (SRI) provides a mechanism for investors to
align personal values with investment objectives by investing in companies with strong
environmental, social and corporate governance conduct. This type of investment strategy may
help to provide important societal or environmental benefits through companies with a focus on
effectively utilizing environmental resources, fostering safer working conditions, or improving
corporate governance.
It's important to note that socially responsible investing doesn't mean you have to settle for lower
returns while simultaneously supporting causes you care about. After examining performance
data for 10,228 open-end mutual funds, researchers found that investing in sustainability has
usually met, and sometimes exceeded, the performance of comparable traditional investments on
a risk-adjusted basis, across asset classes and over time.*
As you learn more about this topic, keep in mind, the term socially responsible investing is often
used interchangeably with "sustainable investing," "responsible investing," and "impact
investing."
Understanding environmental, social, and governance (ESG) factors
ESG stands for environmental, social, and governance, which are factors that are generally
viewed as assessing how well a company is positioned to address the potential risk and costs
associated with these key issues. For example, how is the company managing labor, employee
health and safety, or consumer product liability?
The overarching goal of socially responsible investing is to achieve competitive financial returns
while also having a positive impact on society, or to avoid investing in companies that conflict
with your personal values. For example, if you were concerned about sustainable sourcing, you
might choose to buy only a certain brand of coffee. To take it one step further, you might choose
to invest in the same coffee company. If you were concerned about a company’s negative impact
on the environment, you might avoid investing in companies with extremely high carbon
emissions.
Factors to consider when pursuing an SRI strategy
SRI managers and the indexes they track typically incorporate the following ESG criteria into
their investment selection process:
Environmental factors consider how a company performs as a steward of the natural
environment (e.g., a company's carbon emissions, air/water pollution, energy efficiency,
raw material sourcing, and other issues related to environmental practices).
Social factors consider how a company manages relationships with its employees,
suppliers, customers, and the communities in which it operates (e.g., a company's impact
on human health, human rights, labor standards, gender diversity, employee engagement,
and data protection/privacy).
Governance factors can include the quality and reasonableness of a company's leadership,
executive pay, audits and internal controls, and shareholder rights (e.g., diversity of the
Board of Directors, executive compensation, lobbying and political contributions, and
business ethics).
SRI should not be confused with charitable giving or philanthropic efforts to affect social
change. For example, if you were concerned about gender equality in the workplace, you could
donate to a nonprofit organization that is championing this cause. When it comes to your
investment portfolio, you could apply ESG factors to your investment decisions and choose
companies that actively promote gender equality.
Choosing socially responsible investments for your portfolio
Once you've made a decision to invest in a vehicle that relies on SRI factors, the next step is to
decide where to allocate your money. ESG factors can be applied to individual stocks or if you're
seeking professional portfolio management, SRI-focused mutual funds and ETFs may be a good
place to start. Currently, there are more than 150 mutual funds and 45 ETFs with an SRI
mandate, according to Morningstar.
As with non-SRI funds, some fund managers may take an active approach and seek to
outperform an index, while others may take a passive approach and simply try to match a
benchmark index. As you research your choices, keep in mind that no two funds or ETFs are
managed the same way, so it's important to read each prospectus carefully.
ESG, SRI and Impact Investing: Explaining the Difference…
The value of an investment is no longer just about returns. An increasing share of investors are
also calling for their money to make a positive impact on society. Socially Responsible Investing
and Impact Investing now accounts for more than $1 out of every $5 under professional
management in the US, according to a 2016 survey by the US Forum for Sustainable and
Responsible Investments. This amounts to over $8 trillion in assets under management.
What Is ESG?
ESG refers to the environmental, social and governance practices of an investment that may have
a material impact on the performance of that investment. The integration of ESG factors is used
to enhance traditional financial analysis by identifying potential risks and opportunities beyond
technical valuations. While there is an overlay of social consciousness, the main objective of
ESG evaluation remains financial performance.
The table below lists common ESG factors that are considered. Investments with good ESG
scores have the potential to drive returns, while those with poor ESG scores may inhibit returns.
What Is SRI?
Socially Responsible Investing goes one step further than ESG by actively eliminating or
selecting investments according to specific ethical guidelines. The underlying motive could be
religion, personal values or political beliefs. Unlike ESG analysis, which shapes valuations, SRI
uses ESG factors to apply negative or positive screens on the investment universe.
For example, an investor may wish to avoid any mutual fund or exchange-traded fund (ETF) that
invests in companies engaged in firearms production because he/she holds anti-conflict beliefs.
Alternatively, an investor may opt to allocate a fixed portion of his/her portfolio to companies
that contribute to charitable causes.
Alcohol, tobacco and other addictive substances
Gambling
Production of weapons and defense tools
Terrorism affiliations
Human rights and labor violations
Environmental damage
For clients engaged in socially responsible investing, making a profit is still important, but must
be balanced against principles. The goal is to generate returns without violating one’s social
conscience.
Where does Impact Investing fit in?
In Impact or Thematic Investing, positive outcomes are of the utmost importance - meaning the
investments need to have a positive impact in some way. So, the objective of impact investing is
to help a business or organization accomplish specific goals that are beneficial to society or the
environment. Investing in a non-profit dedicated to the research and development of clean
energy, regardless of whether success is guaranteed, is an example.
When you’re getting started with investing, it’s important to research the options available to
you. One such option, known as socially responsible investing (SRI), enables you to grow your
money while doing good. It allows you to invest in social causes you care about. In fact, this type
of investing has experienced significant growth in recent years. Socially responsible investments
offer a great way to boost your assets while also making a difference. Consider working with a
financial advisor as you incorporate socially responsible priorities into your investment plans.
What Is Socially Responsible Investing?
Socially responsible investing, also known as ethical and green investing, means avoiding
industries that negatively affect the environment and its people. This includes companies that
produce or invest in alcohol, tobacco, gambling and weapons. Instead, SRI involves investing in
companies engaged in ethical and socially conscious themes, like environmental sustainability
and social justice.
Some investors also consider SRI to stand for sustainable, responsible and impact investing.
Regardless of your preferred definition, socially responsible investing works toward both
positive change and financial gain.
How Does Socially Responsible Investing Work?
Socially responsible investing considers environmental, social and corporate governance, also
known as ESG criteria. These criteria help many socially responsible investors decide which
companies or funds to invest in. This includes companies that respect the environment, treat their
employees and suppliers fairly and promote ethical policies. Some investors believe that
companies that practice good citizenship can yield greater returns than those that don’t.
SRI works the same way as any other style of investing. But SRI adds company ethics and social
responsibility into the equation, instead of simply putting your money into securities for growth.
SRI tends to follow political and social trends. This means they’ve been dedicated to women’s
rights, civil rights and anti-war efforts in the past. Now, socially responsible investors’ focus has
shifted to mostly sustainable solutions to 21st century challenges. This includes climate change
and ethical business practices.
You have several options available to you if you want to invest in good causes. For starters, you
can make socially responsible investments individually or through socially conscious mutual
funds, exchange-traded funds and index funds. You can use a robo-advisor, invest directly or
participate in crowd or community investing. There is also a wide range of SRI products and
asset classes, like public equity investments (stocks), cash and fixed income investments, like
private equity or venture capital.
Start by identifying the level of risk you’re willing to take on. Consider your income and any
current investments you have, including corporate-sponsored retirement plans. Then, define what
“socially responsible,” “sustainable” and “impact” mean to you. Do you want to invest according
to green energy or more in female-led companies? Think about your moral, ethical, religious and
social values. You’ll also have to evaluate individual companies and investments by looking
beyond financial statements. Measure their potential to impact a specific cause or movement.
You should still seek competitive financial returns when looking for socially responsible
investments. It’s important to recognize that while SRI may feel better than other money-making
tactics, it still comes with risks. As with any investment, returns aren’t guaranteed. Assess the
financial outlook of socially responsible investments as you would any others.
Which Investment Firms Practice SRI
It isn’t always easy to determine which investments are strictly socially responsible. For
instance, a company could practice ethical manufacturing processes, only to dispose of waste in
an irresponsible way. Some companies boast that they support female empowerment, but don’t
have any women on their board. It’s important to do your homework to be sure you’re investing
in actually socially responsible institutions.
If you need some help figuring out which companies to invest in, an investment firm can come in
handy. When you work with an investment firm, they’ll manage your portfolio for you, investing
in truly ethical companies. Some names to start your investment firm search include Calvert
Research and Management, Parnassus Investments, Oakmark Funds and SRI Investing. You may
also want to check out the robo-advisor Swell Investing which focuses solely on impact
investing.
Each firm has different impact strategies to find its clients financially healthy and rewarding
investments. They pride themselves in contributing to the world while turning a profit. You
could also turn to a financial advisor to help you get started or scale up your SRI investing. It
helps to do some digging to find out which advisors will be the best fit for your financial goals,
risk profile and principles.
