Socially responsible investment, or SRI, is a strategy that emphasizes not only the financial gains from an investment but also ethical or social change.
Identifying which ventures to put their hard-earned money into can be difficult for potential investors. It is why such investors consider factors such as diversification, dividends, rate of returnRate of ReturnThe Rate of Return (ROR) is the gain or loss of an investment over a period of time copmared to the initial cost of the investment expressed as a percentage. This guide teaches the most common formulas, inflation, taxes, and risks.
Nowadays, socially responsible investors are going one step further. Apart from the aspects mentioned above, they also assess whether a particular investment positively impacts society.
The socially responsible investing approach started with Quakers, a group of individuals who were part of the Religious Society of Friends in the 1700s. At that time, the Quakers refused to participate when other individuals engaged in the slave trade and contributed funds to purchase weapons of war.
Another prominent proponent of the SRI strategy was John Wesley. Wesley, a man of the cloth, proclaimed that earning money at the expense of another individual’s welfare was a sin. He also asked his congregants to avoid participating in gambling and supporting industries, which utilized toxic materials.
For a long time, socially responsible investors avoided investing in the so-called “sin industries” – tobacco, liquor, and gambling. However, the investment trend evolved in the 1960s when people began investing in projects that fostered civil rights as well.
The protest disinvestment that happened in South Africa in the 1980s is a good case in point. During that time, individual investors and companies decided to withdraw their investments from South Africa due to the apartheid policy that caused discrimination against specific races.
While socially responsible investing started as a simple activity associated with religious societies, it’s evolved immensely and is now a mainstream practice. In fact, it is a concept that is growing in popularity as it continues to be embraced by both individuals and corporations.
An SRI encompasses many other types of investing, the similarity between them being that they have a positive social impact. To be specific, investors looking to make such investments focus on three key aspects – environmental, social, and corporate governance (ESG)ESG (Environmental, Social and Governance)Environmental, Social, and Governance (ESG) are the criteria that altogether establish the framework for assessing the impact of the sustainability and. Investors use the three factors to assess the sustainability or social impact of an investment.
Now, socially responsible investors use various approaches to ensure their ventures achieve social goals, namely:
As implied in the name, the technique involves screening a company’s practices and products and/or services before deciding to invest in it. So, if a potential investor discovers that a particular company produces harmful products – such as cigarettes – or engages in unethical practices, then they won’t put their money into it.
Here, an investor chooses to invest in companies whose practices they approve of. For example, let’s say that an individual really cares about the environment. Then, their portfolio will probably comprise investments they’ve made in green energy.
It can also mean that the only companies they’re willing to collaborate with are those that adhere to sustainable practices. Examples of such green practices include:
If an investor wants to try their hand at SRI, community investing is one of the best approaches. It entails putting money in projects that boost communities economically. For example, projects that utilize readily available resources from the community and create opportunities for the disadvantaged.
Taking the different methods into account, there are different types of socially responsible investments. They include:
Several mutual funds and ETFs adhere to the ESG criteria. If an investor is looking to invest in either of the two funds, visit the SIF website, which outlines over 100 socially responsible mutual funds. Also, they can also look at different socially responsible ETFs here.
An investor can also put their money directly into projects that benefit communities. An easy way to make such an investment is to contribute to community development financial institutions (CDFIs).
Another way individuals can make socially-sound investments is by offering microloans or small loans to startups. They can look for businesses in developing countries that offer financial assistance.
Socially responsible investment (SRI) is an investment that achieves financial gain and social/ environmental goals. Making an SRI investment is not that difficult. In fact, it’s not any different from traditional investing. The only thing you’re doing is going a step further to ensure that your actions positively change society.