What is Socially Responsible Investing?
Socially responsible investing is an umbrella term for many different investment approaches including ethical investing, green investing, sustainable investing, and impact investing. The differences come down to how they implement their approach to investing responsibly. Socially responsible investing distinguishes itself from “regular investing” by considering environmental, social and corporate governance issues, not just financial returns.
Socially responsible investing (SRI) is usually about applying specific screens to a possible group of investments. Those screens could be for almost any social or environmental metric. The most common screen is a broad one that covers environmental, social, and corporate governance issues, or ESG in short.
At its mildest, SRI is about screening out the companies that have the worst records in one or more of those areas. This type of a screen may or may not exclude an entire industry. Most commonly companies that derive more than a certain percentage (not necessarily 0%) from the tobacco industry, and companies that produce military weapons, are screened out. A few ETFs that use this type of a screen will go further and screen out companies that are producers or distributors of alcohol, gambling, adult entertainment, and civilian fire arms. What surprises many people is that the environmental part of the ESG screen in broad mutual funds and ETFs rarely means screening out companies that produce or refine fossil fuels. For that you need to focus on the newer green, fossil fuel free, or low carbon funds.
Most investment products that use ESG screens are taking a passive approach to socially responsible investing. They are merely trying to avoid companies that don’t have a good ESG record or that are in an industry that they want to avoid. It is more about doing no harm than actively doing good.
Where ESG screens leave off, impact investing comes in. Impact investing is focused on doing good rather than just avoiding the bad. Many of the impact investing opportunities available are about investing to solve a specific economic, social, or environmental problem.
Impact investing sprang out of philanthropy, and rather than just donating money to a cause, impact investing is about loaning money to a company or project, or investing money in a company that is trying to solve an economic, social, or environmental problem. Impact investing is a more active approach to socially responsible investing than a basic ESG screen. Impact investments also measure their social and/or environmental performance and progress towards their target, in addition to their financial performance.
Is Socially Responsible Investing right for you?
Socially responsible investing comes in various different flavours and there is probably something out there for everyone. Before looking at the various investment options it helps to figure out what your priorities are. You may have to give up some level of diversification and/or pay higher fees to get what you want. The more focused the strategy the higher the fees often are, but to some that trade off is worthwhile to avoid certain sectors or investments.