While thinking of doing something good for society, we often think about donating, charity or volunteering. Investing is another way that might not come easily to our minds.
It may be difficult to accept at first, as investments are often made with expectations of hefty returns. However, an investment practice exists that aims at the betterment of society: socially responsible investing.
This article discusses what SRI is, its concept, types and ways to make socially responsible investments.
What Is Socially Responsible Investing (SRI)?
Socially responsible investing (SRI) is an investment strategy aiming to make a positive social impact in addition to generating investment returns. Socially responsible investors may invest in socially conscious companies and avoid those offering products or services that seem to impact society negatively.
Understanding Socially Responsible Investing
While diving into the history of socially responsible investing, its origin may be found in the 1700s, when a group of people known as Quakers denied being in the business of buying or selling humans. John Wesley was another well-known supporter of this practice, who believed that making money at the price of another individual’s welfare was a sin.
Though the practice started as a simple activity, it is gaining popularity over time. Some of the areas where investors focus when it comes to socially responsible investing are:
- Environmental impact
- Human rights
- Community relations and development
- Consumer protection
- Corporate governance
For the betterment of society, socially responsible investing may avoid investing in businesses that produce or sell products which seem to affect society. It may include businesses that offer alcohol, tobacco, fast food, fossil fuels, weapons, etc., and those engaged in activities like gambling, pornography, etc.
Pros and Cons of Socially Responsible Investing
| Pros | Cons |
| The SRI investment strategy involves investing money and earning returns from the companies or funds that match your beliefs. | You may lose out on some returns by aggressively focusing on socially conscious factors. |
| You are contributing to and encouraging the companies that act ethically and discourage those who don’t. | SRI is highly subjective, and the sensitive areas differ among investors. |
Types Of Socially Responsible Investing
1. Mutual funds
Socially responsible mutual funds include a socially responsible investment portfolio, i.e. securities of companies upholding social, ethical and environmental beliefs. For instance, a fund may consist of securities of various companies that at least adhere to minimum environmental requirements, and one can check the fund’s objective from its factsheet.
2. Exchange-traded funds
Some SRI funds also trade on stock exchanges, similar to stocks. Such funds have various securities of companies that match the investment objective of mutual funds, such as environmental protection, community development, etc.
3. Microfinance
Socially responsible investments can also be made by offering small loans to those who lack access to funds or have lower socioeconomic backgrounds.
Ways To Make Socially Responsible Investments
1. Negative screening
Negative screening means finding securities of companies that do not fit your beliefs and discarding them from your investment options list. For instance, you may find and discard companies that produce or offer harmful products such as tobacco, alcohol, cigarettes, etc., or be involved in unethical activities, such as gambling. It may make it easy for you to find where to invest.
2. Positive investing
Another way you may consider is to find companies that fit your beliefs. For instance, if you are highly concerned about the environment, you may invest in fossil-fuel-free companies with eco-friendly policies at work. If you believe in women empowerment, you may look for companies working in that area and invest there.
3. Community investing
You may invest in projects that focus on improving the local community or initiatives that economically strengthen the local communities. For instance, you may buy a house in your area and provide it to low-income tenants at an affordable rent.
Final Thoughts
SRI is an investment strategy that does not only aim for financial gains but also for social welfare. However, one should also assess past investment returns, risks, investment horizons, and other aspects and ensure whether the companies are doing what they are claiming before investing.
FAQs
Socially responsible investing is needed to strengthen companies engaged in businesses that create positive social impact and encourage other businesses to adopt socially responsible corporate practices.
Whether socially responsible investments perform well depends on the companies or funds you select, market conditions, and many other factors.
Investors considering ESG investing practice consider the impact of the company’s adoption of environmental, social and corporate governance on its performance. In comparison, socially responsible investing includes investing or discarding companies based on their social and environmental impact. However, SRI and ESG are used interchangeably many times.
