The idea of using investment to make the world a better place isn’t new, but it has enjoyed a surge in popularity in the last few years.
More and more investors are interested in giving something back to society, and the idea that profit and ethics don’t mix is now looking old-fashioned.
Such is the popularity of ethical investing, that it has been given its own acronym – SRI, for Socially Responsible Investing.
In this article, we’ll take a deeper look at this type of investing – what it is, why it’s so popular, and how you can use it to both generate profits and make the world a better place.
What Is SRI?
Broadly speaking, socially responsible investing (SRI) is a form of investing that aims to generate social impact as well as returns.
The types of social impact sought by investors is as variable as investors themselves – some want to promote green energy, while others want to invest in companies who share their religious values.
The strategies that can be used as part of SRI are also very broad. Some investors focus on putting money behind companies or sectors that they think will have a positive impact on the world.
Others are content to avoid investing in companies who they feel are having a negative impact – like oil and mining companies.
SRI tends to go by many names: value-based investing, sustainable investing and ethical investing. The abbreviation “SRI” has also come to stand for sustainable, responsible and impact investing.
Some SRI practices use a framework of environmental, social and governance factors to guide their investing. This is generally referred to as ESG investing.
Whatever you call it, it’s clear that SRI is becoming very popular. According to a 2019 Morgan Stanley survey, 85% of individual investors are interested in sustainable investing, up from 75% in 2017.
The options available to those investors have also grown: investment research company Morningstar says there were 303 sustainable open-ended mutual funds and exchange-traded funds in 2019, up from 111 in 2014.
Does SRI Work?
When it comes to assessing the success of SRI, a lot depends on how you define “success”!
There are two clear answers, however.
First, it’s important to recognize that SRI is not a charity. SRI is not about giving money to good causes – it’s about investing in companies that you think will have a positive social impact, but that also will generate a profit for you.
In fact, research suggests that investing in this way can actually increase profits over more traditional investment approaches.
A 2020 research analysis from asset-management firm Arabesque Partners, for instance, found that 80% of the reviewed studies demonstrated that sustainability practices have a positive influence on investment performance.
This might seem strange, but this is likely due to the fact that SRI requires that investors research the internal workings of a company before they put their money behind it. Thus, making them more likely to spot issues.
The second way of answering the question would be to look at the social impact of investment – as in whether investing can “change the world”.
This is, of course, a far more difficult question to answer. But it’s clear that, at least in the short term, putting your money behind causes you care about is going to (at least) make them more publicly visible.
How To Build An SRI Investment Portfolio
When it comes to getting into SRI, there are essentially two ways of doing this – use a company that specializes in SRI, or design your own portfolio.
The majority of people prefer to make socially responsible investments when possible — but it takes some work to figure out how committed a company really is to ethical practices.
Robo-advisors can help take care of that. There are a number of SRI-focused robo-advisors available, and this is a low-effort way of making ethical investments.
However, this type of investment also comes with disadvantages- you can’t really add in stocks that you are particularly interested in.
This is where a platform like Wealthface really comes in. With Wealthface, you have total control over the stocks and other assets you invest in.
Hence, you can design your own portfolio and build one that reflects your values!
This allows you to do your own research into which companies you’d like to invest in, and then adding them to your portfolio, while managing everything straight from your phone or laptop.
Once you have a brokerage account and know your priorities, you can start building a portfolio that supports what matters to you.
An easy way to judge how socially responsible a company is through reviewing ratings from independent research firms such as Morningstar.
Based on these ratings, you can add individual stocks to your portfolio, and using Wealthface’s automated tools, you can then re-balance your portfolio whenever you want to!
Research suggests that the recent rise in SRI is far more than a short-term trend.
In fact, this style of investing has been growing in popularity for years, and is likely to continue to do so as a new generation of investors enters the market.
Younger investors are so keen to make their investments ethically sound that we might have to stop referring to SRI as a specialist investment because this will likely become the standard way to invest in the future.