What is Socially Responsible Investing?

UTC by Adedamola Bada · 7 min read
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Photo: Depositphotos
Photo: Depositphotos

Socially Responsible Investing, or investments that meet a standard of social responsibility, proved to have numerous societal and monetary advantages. However, there are also some considerations to keep in mind.

As an investment approach, Socially Responsible Investing (SRI) is centered on an ethical framework that assumes the investor has a commitment to act for the benefit of society. SRI is a form of investment, where an investor invests money into companies and funds that have a positive social impact and the investment is done within an ethical framework.

Or rather simply, a form of investment in which the investor has an obligation to act within the interest of the general public.

Recently, socially responsible investments have become rather popular because it is after all investment, and the investors at the end of the day, make their profits while still supporting issues that the investor is interested in. Generally, SRI investors and companies refrain from investing in products and businesses that are considered by the general public to have negative effects on life such as firearms, alcoholic drinks, cigarettes, etc., and focus on green technology and renewable energy sources.

Socially Responsible investments have two goals: social effect and monetary gain. These two aren’t necessarily mutually exclusive as the fact that an investment is socially profitable does not mean it would generate the required profit, and the fact that an investment is profitable does not mean that it is socially beneficial. The investor or investment company has to ascertain the social benefits as well as its financial gains.

Types of Socially Responsible Investing

There is no specific approach to Socially Responsible Investing, but I have outlined some of the most popular methods of SRI:

Socially Responsible Investment funds: These are investments that fully abstain from businesses that are not within the society approved guidelines using positive and negative screening. They are focused more on charity investments.

Positive screenings refer to going to investments that have a positive social impact. Whatever investments made with positive screening must provide societal good, as well as provide profits for the investments. Such as green, and ocean cleanup technology.

Negative screening refers to avoiding investments that are “unethical” and against the investor’s or company’s beliefs. They generally avoid carbon-based investments or stocks that suffer from general controversy.

Environmental, Social, and Governance funds: The primary objective of this evaluation is financial gain for investors. They take into consideration the material impact of investments, taking into consideration the environmental, social, and governance-based practices.

Impact funds: All Investment funds that are carried out in these funds must first achieve positive social or environmental goals before financial gains are considered.

Faith funds: all investments carried out in these funds are made with the guidance of religious or ethical beliefs and practices.

Over $6 trillion of the U.S. investments are made in SRI. Between 2016 and 2018, U.S. based SRI assets increased by 38%. Although, it must be stated that SRI investments are not for everyone. They are simply for those who value social and community development ahead of or at par with making monetary gains. Some of these SRI investments use a strategy called Screening.

Screening

This involves employing the use of negative and positive filters to either avoid or buy into an investment. These filters select investment companies based on the following criteria:

Industries

Usually, they avoid all oil-based companies, coal-based companies, etc., because they are usually surrounded by pollution controversies and opt for industries that are invested in providing safer and alternative energy sources.

Policies and Practices

SRI investors look at the company and how they treat their workers in terms of health care, Human resources, working principles e.t.c. Investors do this because some companies brand themselves as eco-friendly establishments and end up facing controversy about their work ethics and “social consciousness”.

Country

SRI investors generally avoid countries that their current administration has bad records of human rights treatment.

Corporate SRI

Investors select companies based on their track record with their work in the society, how well they have effected change in their immediate community, and how much they promote women’s rights to equality.

An example is a case in which a community, who have a good track record in social responsibility, lacking access to funds from the government, banks, loans from other financial institutions, the investment funds allow for the provision of loans to dwellers, affordable housing, and other amenities. This, in turn, reduces the dependency of said community on the government whilst boosting the economy.

Advantages of Socially Responsible Investing

Here’re just a few of the societal and economic advantages connected with Socially Responsible Investing.

Encouraging the Good

Socially Responsible investors are fixated on motivating socially responsible companies with cash flow in an endeavor to expand the reach of said company and effect positive changes in the environment and community at large. In the long term run, small investments eventually result in big-time social and communal development.

Taking as an example, Lego, the popular toy company. They ended their contract with Shell oil and are now partnering up with the World Wildlife Foundation. They have been working to reduce their carbon waste disposal, and also have a target for a 100% clean renewable energy source by the year 2030.

Hands-off Approach

When you invest in SRI, there’s a certain degree of peace and assurance with their stocks. Unlike other funds where investors keep having to check the market to know how their funds are faring, SRI invests mainly in government, low-risk bonds. That way, investors can shift their attention to other investments they have in the market.

Integrity

Since SRI involves investing in line with religious and cultural beliefs, an investor, not only establishes a reputation as a good and trustworthy manager of finances but also as a committed environmentalist.

General Improvement

Poverty in underdeveloped countries is addressed with SRI by providing basic amenities like food, clothing, and shelter to displaced people in said countries. They also help to encourage green-based companies from starting up and finding even better ways to produce energy without destroying the atmosphere, ozone layer and causing global warming.

Special Considerations

Socially Responsible Investments are dependent on the religious, social and political situation at a particular time. This is a factor that can change with time with any number of the investors, and once such change happens, the investment suffers due to a possible falling out of investors. Such falling out can be as a result of an investor changing his/her mind about putting principles ahead of profit due to the performance of some other high yield stocks in the market.

This is why, in most cases, Socially Responsible Investments are done using the ESG (Environmental, Social, and Governance) factors for investing. The ESG practice, which focuses mainly on the company and whether or not they participate in community development, has shown that focusing on this approach, has a higher probability of producing returns rather than investing in religious, social and moral values alone.

In the 1960s, when investors were searching for causes to invest in, Martin Luther King Jr. raised awareness for the civil rights movement by tagging companies that opposed the cause as “socially irresponsible”.

Environmental, Social, and Governance based investments are becoming rather popular, many individuals and corporate businesses are now venturing into investing in companies that are in line with moral values. The concept of ESG is still involving but it has gotten the attention of major investors in the market.

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