Investing responsibly is becoming more common as people learn more about the effects of their investments on society and the environment. As such, SRI has become a popular buzzword in the investment world.
Socially responsible investing (SRI) refers to investment strategies that consider social and environmental factors when making investment decisions.
Investors who are socially responsible, or SRI, invest in businesses and organizations that promote positive social and environmental impact. These investors tend to avoid investments in industries such as nuclear weapons, gambling, and tobacco. Instead, they are looking for ways to align their portfolio with their personal values and beliefs while simultaneously growing their assets.
An SRI strategy is not just about avoiding certain stocks; it’s about selecting companies based on certain principles and it can have numerous benefits, including lower risk, higher potential returns, and a positive impact on the world. But there are many different types of SRI strategies, each with its own risks and rewards.
Keep reading our article to learn more about socially responsible investments and their potential benefits.
What Is Socially Responsible Investing?
Socially responsible investing (SRI) is an investment approach that considers the effect of a company’s activities on society and the environment, in addition to its financial results.
SRI has been practiced around the world for more than 50 years. More specifically, in the U.S., the primary focus of SRI is on environmental, social, and corporate governance (ESG) issues.
SRI investors put their money across a broad range of industries, sectors, and countries, just like other funds. SRI funds, however, may have different investment objectives, strategies, and management teams.
Like other types of funds, investors can buy shares in SRI funds. A fund’s investment adviser decides which companies to buy and sell. There are certain factors advisers often assess when determining socially responsible companies such as ‘Does the company publish sustainability reports?’ ‘Are they transparent about describing their efforts to promote social and environmental interests?’
Why Socially Responsible Investments?
The world is changing, and investors are demanding more from companies. There are many reasons why socially responsible investing has become a more common strategy. Some of them include:
Make a Positive Change… and Make Money in the Process
One reason is that more investors have become interested in sustainable investing, while making a profit.
Yes, there has been a lot of controversy about social responsible investing, with critics claiming that these strategies don’t lead to better returns. However, recent studies suggest that SRI strategies can help investors earn better returns than investors who ignore social and environmental issues as well as achieve better risk-adjusted returns over the long term.
Investors who take into account social and environmental factors may be able to reduce their overall risk by avoiding industries with high risks.
However, note that investing in socially responsible companies may help you sleep better at night, but it’s not a get-rich-quick scheme. You must be patient if you want to see a positive return on your investment.
Investors Want To Make an Impact by Supporting Good Causes
Another reason for the growth of socially responsible investing is that more investors are looking for ways to support their values through their investments.
They want to invest in companies that are actively making a positive impact on society, such as companies that provide employees with good benefits, or are environmentally friendly.
Another plus that comes with SRI is investors can feel good about the positive impact they’ve made by supporting companies making a difference in their communities and around the world.
Investors Want To Reduce Their Exposure To Certain Industries
Sustainable investing is about investing in companies that are doing a good job of managing their environmental impacts, such as reducing greenhouse gas emissions and conserving water.
Some socially responsible investors may want to avoid certain industries, such as industries that produce tobacco products or nuclear weapons.
Additionally, investors who select companies in industries unrelated to their current holdings may be able to reduce their overall risk by diversifying their portfolios. This is because the growing interest in SRI has led investment firms to create more socially responsible investment opportunities, including exchange-traded funds, mutual funds, and socially responsible investment indices.
How to Select Socially Responsible Investments
Assess Where You Are Now
Before you can put together a strategy for socially responsible investing, you must first identify where you are at the moment. Are you already invested in socially responsible companies? Are there any industries you’d like to avoid?
Research Potential Candidates
Once you’ve identified the industries you want to avoid and the companies you should invest in, it’s time to research potential candidates. You can start by checking Socially Responsible Investment (SRI) indices.
You can also use specialized investment research tools that include values such as corporate social responsibility and sustainability in their investment strategy. Try and ask the following questions:
- How does the company earn money?
- What is the company’s track record concerning its stakeholders?
- What is the company’s reputation?
- What industries does the company operate in?
- How is the company managed?
As you consider these factors, keep in mind that there is no single definition of what makes an investment socially responsible. What’s important is that you define your own standards and select investments that meet those standards. Investors can select investments in a number of ways:
- By industry. Some investors choose industries that interest them and select companies within those industries that have positive social and environmental track records.
- By issue. Some investors identify specific issues that interest them, such as human rights, the environment, or corporate governance. They select companies whose activities positively impact those issues.
- By company. Some investors select individual companies that have strong records on issues of interest, even if their industries aren’t attractive.
The Final Words
SRI investing may not be for everyone, but it’s an approach worth considering. Nonetheless, socially responsible investing takes more than avoiding companies in industries such as nuclear weapons, gambling, and tobacco. It also requires a deep dive into the corporate social responsibility (CSR) reports of companies you consider investing in.
Keep in mind that not all socially responsible investments will have a positive impact on your portfolio. The key to success is to put research before everything else and make sure you’re making smart investment decisions.