Socially Responsible Investing

Socially Responsible Investing

Anant Jain

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) talks about Socially Responsible Investing.

Introduction

Socially responsible investing (SRI) is a type of investment that is categorized to be socially responsible due to the nature of the operation the company conducts. SRI is an investment that considers two aspects: 1) social/environmental changes; and 2) financial performance.

SRI refers both to the firms which invest by considering the environment and society (on the assets side of their balance sheet) and financial investors (banks, funds, etc.) who brings financial resources (debt or equity) to finance the physical investment (on the liabilities side of firms’ balance sheet).

In other words, socially responsible investors promote practices that they personally believe will lead to environmental benefits, consumer protection, racial/gender diversity, etc. Some socially responsible investors also do the opposite of investing by avoiding companies that have a negative impact in society such as alcohol, tobacco, deforestation, pollution, etc.

Understanding SRI

For socially responsible investing, financial investors do not use the typical metrics such as financial performance to select a company for investment. While investing in SRIs, investors ensure that the operation and business practices of a company aligns with his or her personal values. Since every investor has a different set of personal values, the definition of SRI varies from person to person.

For example, if you are concerned about the environment, your portfolio may have investments in green energy (such as wind, water or solar energy). If you are enthusiastic about racial equality, you might invest in companies employing or founded by people from different racial groups.

In recent years, “socially conscious” investing has been increasing into a mass followed practice as there are multiple funds and investment opportunities available to investors.
For example, mutual funds and exchange-traded funds (ETFs) provide investors with exposure to multiple companies spread across various sectors with a single investment vehicle.

As mentioned above, SRIs have two main aspects: environmental/social impact and financial performance. But it does not mean both these aspects have to go hand-in-hand. There is no surety that an investment resulting in positive environmental impact, will also result in financial gains for investors. Therefore, investors should still access the financial outlook of the investment while focusing on its environmental/social value.

Ways to Make Socially Responsible Investments

Investors looking to make investments in SRIs focus on the following criteria: Environmental, Social and Governance (ESG). They use these criteria to access the sustainability or social impact of an investment. Socially responsible investors use different approaches to ensure their ventures achieve social goals: negative screening, positive investing and community investing.

Negative Screening

This method involves screening a company’s operations and products/services before taking a decision to invest in it. It means that if investors discover that a particular company indulges in practices that is against their personal values, for example, say gender discrimination, then investors won’t invest in that company.

Positive Investing

Investors agree to invest in companies whose operations align with their personal values. For example, an investor who cares about environment would invest in green energy.

Community Investing

If an investor is keen to invest in SRIs, community investing is an excellent approach. The investor basically puts his or her money in projects that boosts local communities economically. For example, investing in projects that utilize resources that are readily available and create employment opportunities for the unemployed.

Types of Socially Responsible Investments

There are different types of SRIs available to investors. Three of the most common mediums are mentioned below:

Mutual funds and exchange-traded funds (ETFs)

Some mutual funds and ETFs follow the Environmental, Social and Governance (ESG) criteria. For example, investors looking to invest in either of the two funds can visit the SIF website, which displays over 100 socially responsible mutual funds and socially responsible ETFs.

Community Investments

Investors can socially invest by directly putting their money into projects that benefit communities. An easy way to make such investments is by contributing to Community Development Financial Institutions (CDFIs).

Microfinance

Investors can also make socially conscious investments by offering micro-loans or small loans to start-ups. They can search for businesses in developing countries that require financial assistance.

SRI financial performance

A socially responsible investment may result in financial gains. A 2020 research analysis from asset-management firm Arabesque Partners found that 80% of the reviewed studies demonstrated that sustainability practices have a positive influence on investment performance.

Several studies have indicated that SRI mutual funds are not only at par with traditional mutual funds in performance, but they can sometimes perform better. There is also evidence that SRI funds may be less volatile than traditional funds.

In the past, there have been controversies about SRI, with opponents arguing that restricting the field of investment options can also lead to a restriction of investment returns. Now, there is a growing pool of evidence that indicates the opposite: SRI is not only good for the society, but also for you!

Useful resources

Related posts on the SimTrade blog

Jain A. Impact Investing

Jain A. Environmental, Social & Governance (ESG) Criteria

About the author

The article was written in July 2021 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).

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