21st-century individuals are inclined towards being socially responsible and morally conscious. With that being said, socially responsible investment has become the latest buzzword within Wallstreet avenue. We ought to agree that the Wallstreet is a giant labyrinth where investments and funding go hand-in-hand. Although it is seldom associated with morality or ethics, it is not entirely devoid of conscience. Thus, the idea of socially responsible investment has boomed in the current time. Moreover, the growing concerns for climate change implications have further piqued the interest of many investors to be socially aware.
SRI or otherwise known as Socially Responsible Investment can be summarized as investing money in a way that caters to your financial returns while taking care of the overall impact on the world around you. It often constitutes a small percentage of total funds invested by corporations and is riddled with obstacles. It also influences and governs how asset managers invest portfolios.
If you are someone who is keen on aligning your values with your finances and investments, this article will help you learn the basics of `Socially Responsible Investments and how to consider them.
What is Socially Responsible Investment?
Socially Responsible Investments are considered socially responsible due to the nature of the business conducted by the company. It encourages corporate practices to believe that they promote environmental stewardship, consumer protection, human rights and racial or gender diversity. The areas of concern recognized by the SRI practitioners are also summarized as ESG issues—environment, social justice, and corporate governance.
At times, socially responsible investing also refers to practices that seek to avoid harm by screening companies for ESG risks before deciding whether or not they should be included in an investment portfolio. However, the term is also used more broadly to include more proactive practices such as impact investing, shareholder advocacy and community investing.
When you are vesting yourself toward socially responsible investments, you are contributing towards eschewing investments that deal with or produce toxic or addictive substances such as alcohol, products or services encouraging gambling or tobacco. You are seeking out companies that are indulged in encouraging social justice, environmental sustainability and alternative energy/clean technology efforts.
Currently, socially responsible investment tends to go by various names—including values-based investing, sustainable investing and ethical investing. Moreover, the abbreviation “SRI” has also come to stand for sustainable, responsible and impact investing. Additionally, some SRI practices use a framework of environmental, social and governance factors to guide their investing, which is generally referred to as ESG investing.
While ESG investing considers specific factors such as the company’s best practices (when it comes to issues like pollution or child labor) as well as the quality of leadership, socially responsible investing takes account of these factors and considers the investor’s motives such as their personal values or political beliefs. Nonetheless, various investment portfolios take both elements of ESG and SRI investing into account—ultimately leaving the final decision of investment to the investors.
What makes socially responsible investment important?
In 1970, Milton Friedman (American economist) famously wrote, “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” Business firms or large organizations do not always bear the full social costs of their actions. For example, a coal power plant that expels its waste into the atmosphere could increase the prevalence of acid rain and make the surrounding area less desirable to live in, potentially hurting property values. Because the power generating firm does not directly bear these costs (in the absence of regulation), it may produce more electricity from coal than is socially optimal. So a narrow focus on profit maximization does not always lead to the most efficient social outcome.
A socially responsible investor might want to put their money in a company that has adopted a way to bring clean water to third-world countries. Over the past few years, socially responsible investments have gained great traction as popular investment strategy. Moreover, with the news of shady and illegal investment deals becoming common, several active investors have begun to insist that the companies they invest in make responsible choices.
In the present scenario, socially responsible investing has become a trending form of investing. Socially responsible investments have gained immense recognition for being an opportunity to make good returns while contributing to an important social, environmental, or even governance issue that matters to the investors.
You should be mindful that socially responsible investments are still investments. Before making any investment, you should measure their benefits as well as drawbacks. You should also weigh them on the aspects of return in order to determine how good a return these investments can be and their ability to satisfy your social goals.
What to consider during a socially responsible investment?
Although socially responsible investments contribute towards the greater good, it is an investment strategy. Socially responsible investments have two prime inherent goals: social impact and financial gain. Before you proceed to make a socially responsible investment, you ought to keep a few points in consideration.
- A socially responsible investment does not necessarily assure a good return.
- The promise of a good return is far from an assurance that the nature of the company involved is socially conscious.
- Assessing the financial outlook of the investment while trying to determine its social value is crucial.
What are the benefits and drawbacks of Socially Responsible Investments?
Being socially vocal is appreciable. However, being socially vocal as well as actively abiding by your social and moral values is commendable. With socially responsible investments, you are not only portraying your social voice but also aligning your social values with your actions. By investing in socially responsible businesses, you’re doing more than talking the talk, you are laying your value cards on the table. Moreover, committing to socially responsible investing provides an opportunity to withhold your investments from businesses that are not abiding by socially.
With any form of investment strategy, there are associated potential risks. Socially responsible investments offer a multitude of benefits. However, there are several drawbacks of the investment strategy as well. Following can be some of the drawbacks of socially responsible investments:
Socially Responsible Investments imply investing on companies or firms that are socially vocal. As a result, you limit your investment options and potentially incline towards investing in companies that practice social and ethical responsibility. Hence, your return options are limited.
Moreover, your investment options are also limited. Focusing solely on socially responsible stocks and funds can result in leaving out stronger investment options.
With socially responsible investing, you have more flexibility, but you may be mostly on your own when it comes to researching investments that are the right fit. Even if there are ones vetted for you, you may end up paying more fees to do so.
What are Socially Responsible Investment Funds?
SRIF or Socially Responsible Investment Fund are collective investment instruments. Under such investments, you can choose assets that make up your portfolio on the basis of the ESG criteria. These eligibility criteria contribute to making better-informed investment decisions, taking into account financial criteria and less tangible parameters.
SRIF can be formed by taking into account
- exclusion criteria while choosing the assets
- inclusion criteria for businesses or governments applying proactive social responsibility policies
- specific ESG-related topics (such as climate change or water)
SRIF seek to maximize medium and long-term returns. In this, fund managers consider those assets which meet certain ESG standards that are likely to yield higher returns. These funds also seek to reduce the portfolio’s risk as:
- These are well-managed companies;
- Have robust corporate governance policies;
- Aligned with the shareholders which care for the environment and minimize potential regulatory, litigation and reputational risks to generate greater long-term value.
The Endnote: How good an initiative is socially responsible investing?
Socially responsible investments are gaining immense traction in the present time. The now popular investment strategy dates back to the late 1970s (when it started to gain attention of investors as well as the common individuals). Fast forward to the 21st century, sustainability and positive approaches have begun to become the new norm. With the accent of climate change implications and the increase of social issues such as alcohol and tobacco consumption, people in the present day are becoming immensely aware towards inclining their morale and values with organizations that are socially active and promotive. Approaches like socially responsible investments give way for mainstreaming of sustainable investing, which continues to evolve.
As sustainability and corporate social responsibility strategies continue to add perceived consumer and investor value to companies, more investments will be designed with these concerns in mind.