The Basics of Socially Responsible Investing

Socially responsible investing (SRI) also sometimes referred to as sustainable investing or ethical investing, is the practice of making investment decisions based not solely on financial consideration but with a social consciousness at work. SRI looks at ethical, environmental and social concerns. Many investors want to know what their money is funding and do not want to align themselves with anything that is reprehensible in a moral sense.

Socially responsible investors get involved with ventures that will earn them money while also working for the betterment of society in one way or another. Socially responsible investors seek out investment opportunities that promote such things as human rights, the protection of the environment, diversity and consumer protection. Most investors of this kind shy away from anything dealing with alcohol, gambling, the military, pornography, abortion, tobacco and weapons of any kind. Any investment that has a moral connotation that is questionable is one that a socially responsible investor will not agree to be a part of.

History of Socially Responsible Investing

Socially responsible investing is not a new concept. In the United States it dates back to the 1750s and the Religious Society of Friends known as the Quakers. Started in Philadelphia, the Quakers prohibited all of their members from being a part of the slave trade and the buying and selling of human beings.

Socially responsible investing became very popular in the 1970s in order for disapproval to be shown to such practices as South African apartheid and pollution. Approximately $2 trillion is invested into SRI Socially responsible investing ventures in the present day

Approaches to Socially Responsible Investing

There are three approaches that are taken to socially responsible investing. These include portfolio screening, shareholder activism and cause-based investing. Portfolio screening is the most commonly used of the three options, however sometimes more than one approach is put to use at once.

Approach One- Portfolio Screening

Portfolio screening can be subdivided into three categories- negative screening, positive screening and best-of-sector.

Negative Screening- This is what most people think of when they think about socially responsible investing. Investors exclude bonds or stocks that are based on a company being connected with such activities as nuclear power, alcohol, pornography, tobacco or weapons. Often investors will also not invest in what is sometimes referred to as “dirty industries” such as forestry or mining.

Positive Screening- Investors look for companies that are involved in activities that work for the betterment of humankind, such as businesses that provide social or environmental benefits. Companies that promote health care, education or alternative energy would fit into this category. Companies that take a progressive approach that is beyond their regular operations, such as those that seek to further human rights initiatives or those that have recycling programs in their workplaces, comprise what investors in this group are looking for.

Best-of-Sector- Investors look for businesses that may not fit comfortably into the negative or positive screening but instead straddle the middle line. These companies may seek to promote environmental and social concerns even though they may be deemed a “dirty industry”, such as mining or oil and gas. Investors are willing to look at these companies because they are setting a good precedence which can serve as a lesson for other companies to follow.

Some of the practices that an investor is likely to screen before making the decision to invest in a company include but are not limited to:

-Human rights
-Animal testing
-Product safety and worker safety
-Diversity in the workplace
-Environmental practices
-Labor relations
-Gambling, weapons or mining (industry focus)
-Alcohol, tobacco (product focus)
-Nuclear power

Approach Two- Shareholder Activism

Shareholder activism is when a shareholder is able to use his influence and clout in order to encourage the management of a company to put ethical policies and processes into play. The shareholder not only wants to see profit from his position but he wants to bring about positive changes that can benefit everyone involved. This helps attract socially responsible investors and encourages them to get onboard. A shareholder in a corporation is entitled to be a part of all proxy votes. This person can also propose resolutions. If the resolutions garner enough support from other shareholders then the company will have no choice but to implement the changes.

Some examples of companies involved in shareholder activism include Ethical Funds, Real Assets, KAIROS, Meritas and the Investor Responsibility Research Center.

Approach Number Three- Cause-Based Investing

This type of investing focuses on a specific social issue. Not all socially responsible investors are passionate about the same causes. For example some look to help social projects and those living in lower income communities. Often referred to as community investing, the goal is to zero in on investments that can help to create jobs, improve the condition of schools, provide affordable housing, provide low-interest inner-city loans for those interested in starting businesses, and overall community development.

Some examples of cause-based investing groups include the Acre Fund, VanCity Credit Union, and Working Opportunity Fund.

Is it possible for an investor to bring good to the world by SRI but also to make money in the process? Some socially responsible investors choose their investment projects wisely and do very well while others do not. The success of the investor has to do with both current economic trends as well as the type of investments that are chosen.

Always research any potential investment thoroughly before you commit your money or your time to the venture. Emotions play a role in ethical investing and this is good but you must choose your investments with more than just your passion and your heart. Logic and common sense are important here too. Always lead with both your head AND your heart when it comes to socially responsible investing.

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