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Socially Responsible Investing

09/07/2021

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Table of Contents

As sustainable fashion connoisseurs, it’s important to feel good in and about the clothes we wear; from the material source, to the social management of the production process to governance of the supply chain all the way to end-of-life. The ever-increasing ambiguity of supply chains has heightened the need for transparency for well-informed consumers.
If you’re anything like me, it can sometimes be difficult to trust that money is ending up where you intended. Wouldn’t it be great if there was a way to know if funds and companies held certain standards that align with environmental and socially friendly criteria? Luckily, socially responsible investing or green investing is becoming a thing of the present. Investing isn’t just about the returns anymore, it’s about the investment and the company. Investments mimic current political climates, but increasingly environmental and social climates are being considered with equal importance. This has been pushed by investors who want to see their money go towards stocks that are profitable but also reflect social values. Hedge fund managers are also feeling the ethical squeeze to ensure there are green investments.
There are three ways in which this can happen. Socially responsible investing (SRI), Environmental, social and governance (ESG), and impact investing. Let’s dive right in.
socially responsible investing

SRI, ESG and Impact Investing in a nutshell:

Socially responsible investing (SRI), which has been growing in popularity in recent years, is an investment that is considered to be socially responsible based on the business mission of a company or organisation. There are several ways this occurs. The first way is to seek out companies that are engaged in social justice, sustainability efforts and alternative energy or green technology and investing directly. Alternatively, one can invest through a socially conscious exchange-traded fund (ETF) or through a mutual fund. Mutual funds and ETFs provide advantages for investors to gain exposure to multiple companies across many sectors. Key point here! Remember to read carefully through a funds’ prospectus to determine if their philosophies align with yours. Since everyone has different values, how investors define SRI will vary.
Environmental, social and governance (ESG) is a newer term, but it is becoming an integral part of many companies especially with the Paris Agreement and Voluntary Sustainability Standards (VSS). ESG is criteria for a set of standards considered in a company’s operations. Companies use the standards as a way to screen or measure potential investments. Environmental criteria consider how a company is performing as a steward of nature, examining the various steps along their supply chain. It is often the case that these criteria help to manage relationships with suppliers, employees, and customers. Governance criteria looks at how a company’s leadership functions, what the executive pay is, employee wages and also internal controls and shareholder rights. The link to SRI is that investment professions look through the ESG lenses when considering a company to invest in. This lens helps to focus on a company’s practices to see if they truly are investing their energy into sustainability as community improvements.
When it comes to impact investing, the positive outcome of the investments is the most important aspect. The objective of the investments is to help an organization or business to accomplish a specific goal that is beneficial to the environment or culture or society. For example, investing in an NGO dedicated to R&D of clean energy.

Understanding SRI vs. ESG

Just because an investment touts itself as socially responsible doesn't mean that it will provide investors with a good return, and the promise of a good return is far from an assurance that the nature of the company involved is socially conscious.

Alright, let’s dive even a little deeper. There are two inherent goals of socially responsible investing: social impact and financial gain. The two do not necessarily have to go hand in hand; just because an investment touts itself as socially responsible doesn’t mean that it will provide investors with a good return, and the promise of a good return is far from an assurance that the nature of the company involved is socially conscious. An investor must still assess the financial outlook of the investment while trying to gauge its social value. The benefit of integrating ESG criteria is to identify potential risks and opportunities in comparison to financial analysis. SRI goes a step further than ESG by actively selecting investments based on their ethical guidelines. In other words, ESG analysis already shapes valuation, and SRI uses ESG factors to apply negative or positive filters.

There have been previous doubts about SRI, but the benefits seem to outweigh it though. SRI isn’t just good for our conscience, it's also good for your bank.

If your passion is the environment, then your portfolio will likely reflect this through investments in green energy or green technology. Similarly if you want to support diversity advancement your portfolio may show investments in mutual funds that support black-owned businesses or women-run companies. So what is the outcome? Well, a 2020 study from an asset-management firm, Arabesque Partners, found that 80% of the reviewed studies showed that sustainable practices have a positive impact on investment performances. Other studies showed that SRI mutual funds have even performed better than traditional ones and that SRI can even be less volatile. There have been previous doubts about SRI, but the benefits seem to outweigh it though. SRI isn’t just good for our conscience, it’s also good for your bank.

How can you participate and benefit from SRI?

Though it requires a bit more time and research, creating a socially responsible investment portfolio doesn’t have to be intimidating or difficult. If you know what is important to you, you can start investing your dollars to do good.
The first step is to decide if you want to DIY the research and find companies to invest in directly, or if you want external help. Doing SRI research on your own is great, but it can be time consuming and tricky to figure out how ethical a company is. If you choose the help route then opening an investment account through a platform like Robinhood can help you filter out companies you know you want to invest in. An easy way to judge how socially responsible a company is, is to also look at reviews on sites like Morningstar. Mutual funds are also an easy way to diversify your portfolio. Most fund managers have screening tools that select assets based on their chosen criteria. These are even specific enough that you can choose companies who support women in leadership or entirely renewable energy based companies. Hopefully these are a few helpful tips as a beginner to SRI. Happy ethical spending!
Disclaimer: The information contained herein is for informational purposes only. Nothing herein shall be construed to be financial advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors.
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