Even if you have a lot of money and are well versed with the world of finance, deciding how to invest it correctly is going to be difficult. The large number of factors involved in the process are the reason behind that. Some of the common factors to consider are risk and return, taxes, inflation, dividends, and diversification. Even figuring out how you can get the best return on your investment takes a lot of planning (and quite frankly, a little bit of luck). That process becomes even more complicated when you bring the ethics of investment in the fray. That leads into the world of Socially Responsible Investing (SRI). Socially responsible investors don’t just worry about how financially stable a company is and whether its stock is selling at a good price. They are also concerned about the company’s actions towards making the world a better place. In this post, we will discuss the different aspects of socially responsible investing and how you can become a socially responsible investor.
Socially Responsible Investing: All You Need to Know
What is Socially Responsible Investing?
Socially responsible investing, or SRI, is the act of choosing your investments on the basis of social welfare as well as financial gain. Socially responsible investors aim to invest in companies that do business in positive and responsible ways. In general, they look for companies that have a good record on what are known as ESG issues: environment, social justice, and corporate governance.
Although, socially responsible investors form a small section of investors in the world, their percentage is growing steadily. According to a 2014 report by US SIF, an organization for socially responsible investors, the total amount of money invested in managed funds that use SRI strategies has grown from less than $1 trillion in 1995 to more than $6.5 trillion at the beginning of 2014. That’s more than one out of every six dollars under professional management in the United States of America.
How did Socially Responsible Investing start?
The roots of socially responsible investing go back hundreds of years. In the 1700s, members of the Religious Society of Friends, popularly known as Quakers, refused to take part in the slave trade or to invest in weapons of war. Around 1750, John Wesley, an early leader of the Methodist church, wrote a famous sermon, “The Use of Money,” in which he declared that it was a sin to make money at the expense of your own or your neighbor’s welfare. He specifically urged his congregants not to be involved in gambling, usury (loaning money at unreasonably high interest rates), and industries that used toxic chemicals such as arsenic and lead.
For centuries, many socially responsible investors focused on avoiding “sin industries” such as gambling, tobacco, and liquor. However, that began to change in the 1960s, when investors became interested in using their money to promote civil rights, equality for women, and better treatment of workers. SRI achieved one of its most notable successes in the 1980s, when both individual investors and institutions began pulling their money out of South Africa because of its discriminatory policy of apartheid, or strict separation between races. Their efforts played a major part in bringing an end to apartheid in 1994.
It was also during the 1980s that SRI began to attract more attention from mainstream investors. The oldest investment advisor devoted specifically to SRI, Trillium Asset Management, was founded in 1982. Today, Trillium is just one of many companies that offer socially responsible funds to investors. According to the US SIF report, in 2014, there were 480 registered investment companies in the U.S. that took ESG factors into account while choosing their investments.
What are the Goals of Socially Responsible Investors?
Socially Responsible Investing in essence is a type of investing where you invest while keeping your values in mind. However, the values differ from investor to investor.
Socially responsible investors choose their investments to promote a variety of different goals. Some of those goals are:
“Green” investors generally invest their money in companies that take care of the environment by not polluting it and recycling as much as possible. Some refuse to invest in fossil fuels, while others look for companies that minimize the carbon footprint of their products and services.
Like the early Quakers, peace investors won’t invest in war in any way. They avoid all companies that make weapons or profit from conflict in foreign countries.
Many socially responsible investors today continue the time-honored practice of avoiding “sin industries.” Different investors see this category as including different types of enterprises, such as liquor, gambling, pornography, and contraception.
Although many of these issues are popular with the political left, SRI isn’t defined by politics. Both the liberal who refuses to invest in companies that make weapons and the conservative who refuses to invest in hospitals that perform abortions are considered to be socially responsible investors, they just choose their investments based on different standards and values.
Many socially responsible investors refuse to invest in companies that sell tobacco or alcohol. A lot of investors also refuse to invest in companies that make products that pose a risk to human health, such as genetically modified organisms (GMO). Since some of these products can also be seen as threats to the environment, this category overlaps with green investing.
A lot of socially responsible investors refuse to invest in any company that runs its business in countries with a dismal human rights record. Others look for companies that provide their workers with fair wages and decent working conditions. For a lot of investors, big MNCs which run sweat-shops in China, are not a good place to invest their money.
How to be a Socially Responsible Investor?
If you are looking towards becoming a socially responsible investor and promote your social goals, you can use these strategies to start:
Negative screening means refusing to invest in companies that don’t meet your social standards. A classic example is a lot of socially responsible mutual funds avoiding investment in tobacco companies. An extreme form of negative screening is divestment. What it means is pulling all your assets out of specific companies because of how or where they do business. This is the strategy investors used against South African companies as a way to protest against the apartheid in the 1980s.
Although negative screening is the strategy people most often associate with SRI, an equally important tool is positive screening. It involves choosing companies to include in your portfolio specifically because you approve of their behavior. One example is choosing companies that have signed the CERES principles, a code of environmental conduct for businesses developed in 1989. Positive investing is also known as impact investing, or ESG incorporation.
Socially responsible investors don’t just use their values to choose companies for their portfolios, they also try to influence the behavior of companies in which they hold stock. One way to do this is by filing shareholder resolutions. These include proposals to the company’s management about the company’s mode of operation. One popular example is a resolution requiring the company to disclose all the donations it makes to political campaigns. Under the Securities and Exchange Act of 1934, any investor or group of investors who owns at least 1% of a company’s stock (or $2,000 worth) can submit a proposal to be voted on at the next shareholder meeting. Even if a proposal doesn’t win a majority vote at the meeting, it can still influence the management’s decisions if it attracts a significant amount of support.
This is a specific subcategory of positive investing that focuses specifically on investing in community-based organizations, especially in low-income areas. Community investment provides loans to people and organizations that would have trouble getting them otherwise. These loans can be used to fund small businesses and provide much needed services such as housing and education. Community investment can also focus on making communities more sustainable by financing projects such as green energy and smart growth, a type of urban planning designed to reduce sprawl and protect green space.
Socially Responsible Investing: Conclusion
Embracing socially responsible investing is a great thing to do. Not only will you derive happiness through wealth building, you will also derive satisfaction and pleasure from the fact that you are not compromising on your values to earn money. By putting your money in companies that serve good social causes, you will also help make the world a better place.
Meeting both your financial and social goals through your investments is not easy by any means. You need to do a lot of research and due diligence for it. However, that is a one time job. Once you choose your socially responsible investment tool, you can keep investing money in it. Your money will grow, and your values won’t recede. To know more about socially responsible investing, get in touch with a financial advisor from Wealthface.