Depending on your temperament you may or may not have serious questions about what the companies you invest in actually do. For some people it is all about the best returns possible and ignoring the social, environmental, or moral consequences of how the invested companies earn their returns. Others care deeply about what companies do to generate their return, and want to avoid negative consequences as the result of those returns.
The latter view is commonly referred to a Socially Responsible Investing (sometimes called Sustainable and Responsible Investing or SRI), but what exactly someone means when they say Socially Responsible Investing isn’t black and white.
What is Socially Responsible Investing?
When someone wants to invest in mutual funds or stocks that are Socially Responsible, they generally mean they want the companies they invest in to consider not only shareholder interests but also the interests of other stakeholders like local communities, the environment, or society in general.
However, there isn’t just one lump of companies that fit every mold and every version of SRI. There are several different ways to pick your SRI investments.
What are the Types of Socially Responsible Investing?
Here are three major areas that can be used to pick a Socially Responsible Investment.
By far the biggest of the three options, screening allows you to pick any criteria you like to pinpoint the specific SRI investments you want. There are two ways to screen: seeking companies with attributes you want (positive screens) and seeking companies that do things you don’t want (negative screens).
For example, you might do a positive screen for companies that use 50% recycled materials in their products on average. A liquor company might pop up because they use recycled glass in their packaging of the liquor. While you got the positive screen you were looking for, you might have also wanted to avoid so-called “sin” stocks that deal with adult entertainment, alcohol, and tobacco industries.
To avoid the same result you would then have to re-screen or further filter your results to also weed out things you don’t want in a company you invest in.
Some common positive screens include using renewable energy, recycled products, organic foods, avoidance of certain pesticides and chemicals, and similar traits. Some negative screens include use of non-renewable energy sources, chemicals and pesticides, certain objectionable industries, and similar company characteristics.
Your screens can be used to not only find individual companies to invest in, but also in mutual funds that hold hundreds of stocks. There are many socially responsible focused mutual funds to help you target your SRI dollars as well.
Another method of SRI is that of shareholder advocacy. This is where individual shareholders or, more likely, groups of like-minded investors, bring up issues at corporate shareholder meetings. These advocacy groups push management to make decisions that are aligned with those shareholders’ SRI goals. This type of advocacy brings public attention and media scrutiny to companies to further encourage them to do things a better way.
An alternative type of SRI is to invest your funds in a local community (either your own or elsewhere in the world). This type of investing may not generate the highest returns but provide SRI investors the satisfaction in doing something to improve someone else’s situation. Some examples of this are microlending where a $100 loan is given to someone in a 3rd world country to start a business; they then return the loan once they are generating a profit. Other examples include funding small business loans within your local community to encourage local economic growth.
Are Socially Responsible Investment Returns Worse Than Normal Returns?
It is an long-held investing myth that picking Socially Responsible Investments would result in worse returns than other forms of investing. However, more recent studies have shown this to be untrue.
Here are some sources for further research:
- Lobe, Sebastian and Walkshäusl, Christian, Vice vs. Virtue Investing Around the World (May 9, 2011). Available at SSRN: http://ssrn.com/abstract=1089827 or http://dx.doi.org/10.2139/ssrn.1089827
- US SIF’s Performance page and Mutual Fund Performance Chart
Even if Socially Responsible Investments didn’t match other investing options, some investors would be satisfied they didn’t disrespect their values to get a higher return. Whether or not SRI investing will be a successful match for you will be based on both your investment return and investing impact goals.
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