Socially responsible investing (SRI) is one notable sub-branch of investing which has grown in popularity in recent years. Over time, more investors have tended towards more conscious efforts to align with companies which care about their social impact. This article explains how SRI works and also how you can get started.
What is socially responsible investing?
Investing is the act of allocating money into assets with the intention of generating more profit. But to be socially responsible is to invest with an additional intent to support companies which are ethical. Amongst many other trends, it has become quite popular as a way to grow your money in an ethical way.
Another growing trend in recent years is micro-investing, the idea of investing small amounts of money. It is particularly popular with younger generations, through apps such as Spaceship and Raiz, noted in this article. For another strategy on how to invest, check out this article on value investing.
Advantages
There are some key benefits to engaging in socially responsible investing.
1. Value congruence
By ensuring your investments are representative of your personal values of social responsibility, a commitment to actions rather than simply words demonstrates a genuine effort to be socially responsible. It also means that you are actively taking a stand against unethical companies which pursue profits ahead of caring about their social responsibility for positive impact on the world, whether it be through environmentally-friendly practices or creating a healthy environment in the workplace.
2. Variety
Due to social responsibility coming into the forefront of many businesses’ strategies, there are many socially responsible choices of investments for you to choose from.
Disadvantages
However, there are a few potential downsides to pursuing socially responsible investments.
1. Performance vs Ethics
For one, an investor may suffer limited returns because a company prioritises social impact over profitability.
2. Greenwashing
With the rising popularity of ESG funds, companies may desire a reputation for being socially responsible without putting in the work. Known as “greenwashing”, there may be a lack of transparency and honesty behind a company’s claim to be “green”. It is wise to do your research and understand what the company actually does to be more socially conscious.
3. Subjective standard
The standard for what social responsibility is in companies is not definitive and varies amongst different businesses and industries. For example, an investment in nuclear energy could be considered bad due to the potential toxic waste from accidents. However, it may also be considered good as an alternative from producing further carbon-inducing fossil fuel energy.
Approaches
1. Invest in ESG funds
A socially responsible investor can invest in “ESG funds”. Based on the company’s sustainable and socially responsible impact, these funds are evaluated based on environmental, social and also governance factors (ESG).
Environmental factors would consider a company’s efforts to reduce its carbon footprint, any sustainable products or recycling practices. Social factors include how a company is involved within its community, for example through volunteering, as well as the workplace culture and ensuring diverse and equal employment opportunities. Governance factors would point towards the leadership team behind a company, and assess information like whether it is diverse and how reasonable executive compensation is.
For more information on how one company provides ESG fund opportunities, follow this link. If you want to find out more about what ETFs are, read here.
2. Avoid unethical industries
The exclusionary version of choosing to invest in ESG funds, is to not invest in funds and stocks which are unsustainable or unethical. For example, the tobacco industry and alcohol industry are investment options which some socially responsible investors may choose to avoid.
3. Research companies
As part of your portfolio, you can choose to invest in specific stocks that have shown impressive performance in their revenue and net income whilst being ethical. One way to ensure you are being a socially responsible investor is to research the companies. By staying up to date with the ethical practices they have taken, whether that be through a published sustainable report or reviewed on online polling sites of workplace culture, you can ensure that your investments are a reflection of your desire to make a positive social impact.
What are you waiting for?
It’s clear there are serious advantages to it such as ensuring your personal values align with your investment objectives. By investing in ESG funds, avoiding unethical industries or investigating stocks of socially responsible companies, becoming a socially responsible investor can be a part of your future.
For legal guidance on how to protect your investments, feel free to contact one of our Lawpath lawyers. This article explains more about what questions you should consider before doing so.
