Socially Responsible Investing (SRI)
Socially responsible investing is a practice that dates back decades, or even centuries according to some professionals. Initially coming to the forefront in the 60s, the investing discipline has evolved over the years to mimic the evolution of the political and social climate.
What is Socially Responsible Investing (SRI)?
With SRI, there isn’t set criteria that deem a company or fund socially responsible; the evaluation is based more on each investor’s individual ethical guidelines. There are, of course, common themes, such as firearms and tobacco that would typically remove companies from the socially responsible category, but each investor can create their own checklist of investment areas that they personally count as socially responsible. Once they have this list of qualities, they can then start the screening process of removing those that go against their views, and searching for those investments that contribute to their idea of social responsibility.
How does socially responsible investing work?
There are two main goals with socially responsible investing: ensuring that an investment is ethical, whilst also looking for a financial return. Whilst socially responsible investing is important, investors should still research an investment’s financial outlook. Just because it is ethical, it doesn’t guarantee a return.
When dealing with equities, investors can choose to avoid companies with negative ethical factors, seek out companies with positive ethical factors, or a combination of both. It is unlikely that one company is going to be perfect and tick all socially responsible boxes, but by researching their products, goals and social impact, amongst a number of other factors, you can make a decision to whether they support your values.
If you are looking at funds, it can be slightly easier to wade through the noise and find investments that suit you. Fund managers will stipulate what the aim of their fund is within the fund factsheet, KIID and prospectus, which for socially responsible funds will usually include a statement on specific aspects of socially responsible investing. They will also include an explanation of their investment process within the KIID which can give more detail on their investment screening process. This gives you a better idea of whether that particular fund lines up with the guidelines that you are working to.
What makes a company socially responsible?
As mentioned above, the screening process for socially responsible investments can be adapted to each investor’s requirements. However there are a number of common themes that run through SRI for both positive and negative screening.
Negative screenings excludes certain types of investments based on their practices. A commonly excluded group is ‘sin stocks’ which tends to include:
- Defence contracts/Firearms
There is also a growing trend of positive screening, which looks at the proactive positive impact that companies have on the environment and the community. This can take the form of charitable contributions, reducing carbon emissions and/or creating an inclusive culture for their workforce, amongst many other things. The positive screening skews more into Impact investing, but is often taken into account when screening for socially responsible investments as all types of responsible investing tends to overlap.
As with any investment, socially responsible screenings are just part of the research process and are meant to be used in tandem with the general assessments of risk, financial outlook and past performance.
Why is socially responsible investing important?
As previously mentioned, the main focus of socially responsible investing is bringing an individual’s investments in line with their ethical values. On this basis, it’s important that investors believe in what they are investing in.
It’s also important from a sustainability standpoint; socially responsible companies tend to contribute more towards a sustainable future or at the very least, they’re not detrimental to sustainability.
There has been an argument over the years about the financial viability of socially responsible investments, with some saying that investing in SRIs can reduce financial returns against conventional investments, or ‘sin stocks’. However, multiple recent studies have found no statistically significant difference in performance between the SRI and conventional funds. With any investments, socially responsible or not, some will rise and others will fall. As the studies have shown, as long as you do your research, there is as much risk and reward potential when investing ethically as there is when going down a conventional route.