An investment strategy that is designed to yield financial gain and bring positive societal impact
Written byCFI Team
Socially responsible investment, or SRI, is a strategy that considers not only the financial returns from an investment but also its impact on environmental, 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 return, inflation, taxes, and risks.
Nowadays, socially responsible investors are going one step further. Apart from the aspects mentioned above, they choose to factor in whether a particular investment positively impacts society.
A Brief History of Socially Responsible Investment
The socially responsible investing approach may have started with the 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 in the slave trade or the business of buying and selling humans.
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.
Ways to Make Socially Responsible Investments
An SRI encompasses many other types of investments, 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). 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:
1. Negative Screening
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.
2. Positive Investing
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:
- Developing a recycling program at the workplace
- Conserving water
- Purchasing energy-efficient equipment
- Enforcing eco-friendly work policies, such as asking individuals to switch off lights in rooms that are not in use.
3. Community Investing
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 local communities economically. For example, projects that utilize readily available resources from the community and create opportunities for the disadvantaged.
Types of Socially Responsible Investments
Taking the different investing methods into account, there are different types of socially responsible investments. They include:
1. Mutual Funds and Exchange-Traded Funds (ETFs)
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.
2. Community Investments
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).
3. Microfinance
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.
The Bottom Line
Socially responsible investment (SRI) is an investment that achieves financial gain and social/ environmental goals. Implementing SRI is not that difficult. In fact, it’s not any different from traditional investing. The only thing you’re doing is adding an additional investment criteria which allows you to focus on investments that positively change society.
Additional Resources
CFI offers the certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:
- Diversification
- Ethical Investing
- Social Audit
- Sustainability
- See all ESG resources
- See all capital markets resources
