Socially Responsible Investing: What It Is And Why It Has Grown By 600% Over The Past Decade
- Socially responsible investing aims to make a meaningful contribution to social and environmental causes by supporting companies that advocate for them.
- Environmental sustainability, human rights, gender equality and inclusivity are among the most prominent causes that socially responsible investing focuses on.
- While the two terms are sometimes used interchangeably, SRI is different from environmental, social and governance investing in a way it seeks out and identifies investing opportunities.
- While SRI usually relies on screening out the assets to invest or not to invest in, ESG adds a set of sustainability criteria to the asset evaluation process.
- ESG integration can be considered as a sustainable investing strategy since the ultimate objectives of the two approaches are largely the same.
- The ultimate objective of alleviating social and environmental issues is not the only benefit of socially responsible investing.
- Socially responsible investments also boast promising potential for long-term growth, diversifying your portfolio and giving you a deeper insight into your investment opportunities.
At the beginning of 2018, the global value of socially responsible investing assets surpassed $30 trillion.
This impressive number is not exactly surprising, considering that those assets have grown by some 600% over the past decade.
Sustainability is a hot topic across many industries — and finance is no exception. A 2019 report by Morgan Stanley found that 85% of individual investors are interested in sustainable investing.
If you’re one of the 85%, you’ve come to the right place.
In this blog post, we will:
- Explain what socially responsible investing (SRI) is
- Explore the criteria that define socially responsible assets
- Present the most common ways to invest in socially responsible assets
- Give you several reasons to invest in SRI assets
- Draw a comparison between SRI and Environmental, Social and Governance Investing
What Is Socially Responsible Investing?
Socially responsible investing (SRI), also known as sustainable investing, is an investment approach that aims to support social and environmental causes along with providing financial returns.
Investors who follow the SRI principles typically prioritize the social or environmental impact of a company or a mutual find over its financial performance when making an investment.
As a result, a typical sustainable investing portfolio would usually include companies that promote and uphold values, such as:
- Environmental protection
- Human rights
- Consumer rights
- Workers’ rights
- Gender equality
- Racial & ethnical inclusivity
- Community investment
At the same time, some sustainable investing strategies also focus on proactively avoiding investments into industries that violate those values, such as:
- Fossil fuel
- Factory farming
Learn More About
Socially Responsible Investing (SRI) Vs Environmental, Social And Governance (ESG) Investing: Key Differences
Anyone interested in making a sustainable investment inevitably runs across two confusingly similar terms — socially responsible investing (SRI) and environmental, social and governance (ESG) investing.
The two terms are often used interchangeably to identify investment strategies that prioritize supporting sustainable causes.
However, they are not exactly the same thing. And since we’ve already explained what SRI means, let’s define ESG investing before drawing a comparison between the two.
ESG investing focuses on evaluating a company’s impact across three key sustainability factors:
- Environmental factors, which include greenhouse gas emissions, water use, carbon footprint, waste management and wildlife impact
- Social factors, which include work conditions, employee benefits and condition, diversity and inclusivity in the workplace, supply chain ethics and the company’s stance on social issues
- Governance factors, which include shareholder engagement, diversity and inclusivity within the company’s executive board, corporate transparency and fair business practices
In ESG investing, these factors are integrated into the standard financial evaluation of investment opportunities. In this sense, ESG investing is different from socially responsible investing, which typically focuses on explicitly sustainable companies.
In a way, ESG investing is a subcategory or a strategy of socially responsible investing — and we will explore it in this context later on in the article.
How To Find Socially Responsible Investing Opportunities
The first step of your investing journey would be identifying and selecting the right investment opportunities.
You can do that with either one of the three most common asset selection strategies:
#1: Negative Screening
Negative screening is the process of purposefully avoiding investing in businesses that do not follow the best practices of sustainability.
This strategy usually involves completely screening out businesses or entire industries that don’t fulfill specific sustainable investment criteria.
For instance, if the focus of your investment strategy is to promote and support renewable energy, you might end up screening out oil & gas companies or car manufacturers that haven’t made a reasonable commitment to reducing their environmental impact.
#2: Positive Screening
The positive screening strategy is the opposite of negative screening and involves seeking out assets that fulfill your socially responsible investing criteria.
Positive screening usually requires investors to construct a standardized evaluation framework that will help assess the SRI performance of a given company or instrument.
- This framework could include factors, such as:
- Percentage of women in C-level positions
- Organization-wide pay gap between male and female employees
- Monetary value of social benefits received by the employees
- Organization’s carbon footprint
The exact factors within this framework will, once again, depend on the exact SRI criteria within your strategy.
It requires a deeper insight into the operational aspects of a given company and understanding which of those aspects are relevant.
Nevertheless, it can be more rewarding than negative screening. Positive screening can help investors discover unlikely sustainable investing opportunities.
For instance, a positive screening of a farming equipment manufacturer — a seemingly environmentally unfriendly business — may reveal that the company has an outstanding inclusivity and fair labor practices record.
#3: ESG Integration
As outlined above, ESG integration incorporates an assessment of a company’s environmental, social and governance practices into a standard valuation analysis.
In other words, ESG integration means evaluating a company’s SRI performance along with its financial metrics.
In this sense, ESG integration is different from positive screening. The latter is based on seeking out specific investment opportunities that fulfill specific SRI criteria.
ESG integration, on the other hand, simply allows the investors to assess the SRI performance of any given business and predict how that performance will affect the business’ bottom line.
ESG integration is in some ways superior to other sustainable investment strategies, as it still largely follows the traditional investing principles.
ESG investors first identify promising investment opportunities based on their financial performance, and then filter them through the prism of environmental, social and governance sustainability, narrowing the search down.
This approach results in investments that will not only perform well financially but will also contribute to relevant sustainable causes.
What Are The Most Common Types Of Sustainable Investments?
Now that we’ve covered some of the most common ways of finding and picking sustainable investing opportunities, let’s look at the most common ways of investing in those opportunities.
Here are some of the most common types of sustainable investments.
#1: SRI-Oriented Mutual Funds
Mutual funds and ETFs are collections of stock from various corporations, united by the same idea behind the fund — such as sustainability and ESG best practices.
As such, the SRI-oriented funds offer investors an opportunity to invest in a variety of SRI-compliant companies simultaneously.
Just like the different sustainable investing strategies, SRI-oriented mutual funds can vary in their purpose and holdings depending on the sustainability goals they are pursuing.
For example, a gender diversity-focused ETF would be comprised of companies that are known for their efforts to advance gender equality and inclusivity in the corporate environment.
As such, the fund’s portfolio would prominently feature women in executive and boardroom roles, giving investors who share similar values about gender equality in the workplace the opportunity to support those companies through investing in the fund.
#2: Community Investing
Community investing is not investing in the traditional sense of the word, as it doesn’t involve investors buying stock in organizations they wish to support.
Instead, it revolves around investing in those organizations directly — whether through establishing grants or donations.
The rationale behind community investing is that traditional investing might not necessarily make a meaningful impact, as the company stock simply changes hands in the process.
On the other hand, financially supporting an organization directly results in tangible funds that can be immediately to combat tangible issues.
Community investing typically helps tackle issues, such as homelessness, alleviating poverty or supporting small businesses — particularly in historically underserved communities.
#3: SRI Advisors
If you’re unsure what path to take with sustainable investing, you should consider employing an SRI advisory firm to help you build your portfolio.
SRI investing advisor companies typically provide two types of advisory services:
- Robo advisory, which relies on an automated software platform that can help you analyze and pick opportunities for sustainable investing
- Human advisory, where you get to work with human advisors while creating your investing strategy
SRI advisory firms can help you identify your top sustainability priorities and suggest assets to invest in, depending on your capabilities and financial objectives.
What Are The Benefits Of Socially And Environmentally Responsible Investing?
At a glance, the benefits of sustainable investing begin and end with the most obvious one — it allows you to help make the world a better place.
And while SRI certainly offers that, there are a few other reasons why you should consider investing in sustainable companies:
- Potential for long-term growth: As stated at the beginning of this blog post, sustainability-oriented assets have exponentially grown in value over the last decade or so. This is largely because social and environmental sustainability has become increasingly important across industries. This trend is very likely to continue in the future, providing sustainable investments with considerable opportunities for long-term growth.
- Portfolio diversification: One of the golden rules of investing is portfolio diversification — the greater it is, the fewer risks your capital faces during times of volatility and economic downturns. SRI-oriented assets offer an opportunity to diversify your investment portfolio — while making sure that your capital makes a meaningful impact.
- Deep insight into investment opportunities: Scrutinizing the operations and business model of a company is a key element of sustainable investing. After all, its purpose is to make sure that only the companies that follow a pre-determined set of sustainability criteria can enjoy those investments. This process can have an unexpected, yet beneficial side-effect — giving you a deeper insight into your investment opportunities. Identifying what makes a given asset worth investing can help you make more strategic and informed investment decisions in the future.