The Rise of Socially Responsible Investing: What You Need to Know

The Rise of Socially Responsible Investing: A Guide to Making Money and Making a Difference

When it comes to investing, most people are driven by the desire to make a profit. But what if we could make money while also contributing to positive change in the world? That's the promise of Socially Responsible Investing, or SRI. It's an investment strategy that prioritizes both financial returns and positive social and environmental impacts, and it's becoming increasingly popular.

I first became aware of SRI while working on a project about sustainable business practices. I was intrigued by the idea that investors could use their money to support companies that aligned with their values, and I wanted to learn more. As I researched SRI, I was surprised to discover that it's been around for decades, but it's only recently gained mainstream appeal.

In fact, a 2019 Morgan Stanley survey found that 85% of individual investors were interested in sustainable investing, up from 75% in 2017. This rising interest is not only driven by ethical considerations, but also by the growing understanding that socially responsible investing can actually lead to better financial returns.

What Is Socially Responsible Investing (SRI)?

Socially responsible investing (SRI), also known as social investment, is an investment strategy that aims to generate both positive social change and financial returns. SRI focuses on the nature of the business a company conducts, prioritizing investments in companies that demonstrate a commitment to social responsibility.

SRI investors look for companies that are actively engaged in:

• Social Justice: Promoting equality, racial justice, and inclusion through their practices.
• Environmental Sustainability: Minimizing their environmental impact and investing in renewable energy sources.
• Ethical Business Practices: Avoiding harmful industries like alcohol, tobacco, weapons, or fossil fuels.

The term "SRI" is sometimes used as an abbreviation for sustainable, responsible, and impact investing. Investors looking to incorporate SRI practices into their investment strategy often use the framework of environmental, social, and governance (ESG) factors, which are widely recognized as indicators of a company's commitment to social responsibility.

What Are the Goals of Socially Responsible Investing?

There are two main goals of socially responsible investing:

1. Positive Social Impact: SRI aims to make a positive difference in the world by supporting companies and organizations that are actively working to address social and environmental issues. This could include promoting social justice, reducing poverty, fighting climate change, or improving working conditions.

2. Financial Returns: While the primary focus is on social impact, SRI investors are still concerned with financial returns. The goal is to create a portfolio that generates a competitive financial return while also aligning with their values.

Key Considerations for Socially Responsible Investing:

• Special Considerations: Socially responsible investments often mirror the political and social climate of the time. This makes them susceptible to shifts in public opinion, and investments based solely on social values can lose value if those values fall out of favor.

• ESG Framework: To mitigate this risk, many investment professionals analyze socially responsible investments through the lens of environmental, social, and governance (ESG) factors. This framework focuses on a company's management practices and whether they promote sustainability and community improvement.

• Impact of SRI on Financial Returns: While there have been concerns that SRI may result in lower returns due to the limited investment pool, research suggests that a focus on ESG factors can actually improve financial performance.

• Growth of SRI: The demand for SRI has been steadily increasing in recent years, with a growing number of investors seeking to align their investments with their values.

• Types of SRI Investments: SRI investments can be made through individual stocks, mutual funds, or exchange-traded funds (ETFs). Mutual funds and ETFs provide a convenient way for investors to gain exposure to multiple companies across various sectors with a single investment.

Understanding the Difference Between Impact Investing and Socially Responsible Investing

While socially responsible investing is a broad concept, impact investing is a specific type of SRI that focuses on generating measurable social and environmental benefits in addition to financial returns. Both impact investing and socially responsible investing aim to create a positive impact on society, but impact investing uses a stricter criteria for evaluating potential investments.

Impact Investing:

Impact investing seeks to actively create positive change by investing in companies or organizations that are explicitly working to address social or environmental issues. For example, a company that develops sustainable energy technologies or provides affordable housing to low-income families would be considered an impact investment. Impact investing often involves taking a more active role in supporting the companies or organizations that they invest in, such as providing mentorship or guidance.

Socially Responsible Investing:

Socially responsible investing is a broader approach that focuses on excluding companies or industries that engage in harmful activities or have negative social or environmental impacts. For example, socially responsible investors might avoid investing in companies that produce fossil fuels or engage in unethical labor practices.

How to Build a Socially Responsible Investment Portfolio

Building an ethical portfolio doesn't have to be daunting. The first step is to determine your personal values and the type of impact you want to create. Once you have a clear vision, you can decide how much help you want when building your portfolio.

There are two main approaches to creating a socially responsible portfolio:

1. DIY: This is the more hands-on approach. You can select your own specific investments by carefully researching companies and funds.
2. Robo-Advisors: Robo-advisors offer a more streamlined approach. They use algorithms to create and manage a portfolio based on your risk tolerance and financial goals. Some robo-advisors specialize in socially responsible investing and offer pre-built portfolios of socially responsible ETFs.

Investing in SRI:

• Open an Investing Account: The first step is to open an online brokerage account. Some brokerages have stronger socially responsible investment offerings than others, so it's worth researching your options carefully.

• Outline Your Investment Goals: Next, define what is important to you in terms of social impact and financial returns. Consider deal-breakers, such as specific industries or company practices that you want to avoid.

• Research and Select Investments: Research potential investments using reputable resources such as Morningstar. Consider both individual stocks and mutual funds. When researching individual stocks, look beyond financial data to assess the company's commitment to social responsibility through sustainability reports, diversity initiatives, and employee reviews.

• Monitor and Manage Your Portfolio: It's crucial to continuously monitor your investments and ensure they align with your values and financial goals. Remember to adjust your strategy as needed as your goals and circumstances evolve.

Socially Responsible Investing: It's Good for Your Business Too

Socially responsible investing isn't just about making a difference in the world. It's also good for your business.

• Attracting Investors: Investors, especially younger generations, are increasingly looking for socially responsible investments.
• Improving Brand Reputation: Investing in SRI can help you attract more investors and improve your company's brand image.
• Employee Engagement: Employees are more likely to be motivated and engaged when they work for a company that aligns with their values.
• Sustainable Practices: By investing in SRI, you can encourage your company to adopt more sustainable practices and reduce their environmental impact.

How To Get Your Company Started With Socially Responsible Investing:

• Establish Your SRI Criteria: Determine the ESG factors that are most important to your company. Consider your company's mission, vision, and values.

• Draft Your SRI Policy: Develop a written policy that outlines your company's commitment to socially responsible investing and how you will screen investments.

• Engage Stakeholders: Involve key stakeholders, including employees, investors, and board members, in the process of developing your SRI strategy.

• Choose an Investment Strategy: Select an investment strategy that aligns with your SRI criteria.

• Research Potential SRI Investments: Conduct thorough research on potential investments using resources like ESG databases and sustainability reports.

• Monitor and Manage Your Portfolio: Regularly review and adjust your portfolio to ensure it aligns with your SRI goals and to stay up-to-date on ESG trends and best practices.

Why Socially Responsible Investing Matters to the Future:

Socially responsible investing is becoming increasingly important as the world grapples with climate change, social inequality, and environmental issues. It's more than just a financial strategy; it's a way to align your investments with your values and make a positive impact on the world. As more companies and investors become conscious of the need for sustainability, socially responsible investing is likely to play an even greater role in shaping the future.

Frequently Asked Questions:

Q: Is Socially Responsible Investing a new concept?

A: While socially responsible investing has been gaining popularity in recent years, it's not a new concept. The origins of SRI can be traced back to the 18th century with Quaker efforts to avoid investing in businesses that engaged in the slave trade. The 1960s saw the rise of socially responsible investment funds that avoided investing in companies that produced alcohol, tobacco, and weapons. The concept of SRI has evolved significantly over time, reflecting changing social and environmental concerns.

Q: What is the difference between socially responsible investing and ethical investing?

A: Socially responsible investing and ethical investing are often used interchangeably, but they are not the same thing. Socially responsible investing considers a broader range of factors, including environmental sustainability, labor practices, and corporate governance. Ethical investing, on the other hand, focuses on moral principles and avoids investments in industries that are perceived to be unethical, such as those involved in weapons manufacturing, gambling, or tobacco production.

Q: Are socially responsible investments just as risky as traditional investments?

A: Socially responsible investing is not without its risks. While some studies have shown that SRI can generate positive financial returns, the performance of SRI investments can vary and may be susceptible to market fluctuations. It's important to conduct thorough research and due diligence before making any investment decisions.

Q: How can I learn more about Socially Responsible Investing?

A: There are many resources available to help you learn more about socially responsible investing. You can start by reading articles, books, and reports on the subject. You can also consider joining online communities or attending events focused on SRI.

Q: What is the future of Socially Responsible Investing?

A: The future of Socially Responsible Investing is bright. As more investors become aware of the importance of sustainability and social impact, the demand for SRI is likely to continue to grow. There are already many resources and opportunities available to help investors make socially responsible investment decisions, and this trend is likely to continue to expand in the years to come.