Socially responsible investing is a rapidly growing investment category that touches many important and, sometimes, delicate issues. Socially responsible investing takes many forms. Here are six important things that any investor should know about socially responsible investing.
1. What Is Socially Responsible Investing?
Socially responsible investing (SRI) is investing that seeks to drive positive social change and achieve a financial return at the same time. SRI is also known by a variety of other names, such as sustainable investing or responsible investing.
Generally, a socially responsible investor invests in a company’s stock or bonds to support and encourage socially responsible corporate practices. Examples of such practices include environmental, human rights, and consumer protection.
“The terms sustainable, responsible and impact investing, sustainable investing, responsible investing, impact investing and SRI are used interchangeably to describe these investment practices.”
From the US SIF Foundation’s 2016 Report on Sustainable and Responsible Investing Trends which summarizes some of the terms that describe SRI investing.
2. Socially Responsible Investing is Not Defined by Politics
Socially responsible investing reflects the standards and values of the investors. A liberal-leaning environmentalist that refuses to invest in oil companies and a conservative who refuses to invest in a socialist country’s bonds are both considered to be socially responsible investors. They just have different values and beliefs.
3. Types of Socially Responsible Investing
One simple way to view socially responsible investing is to attach the investing activities into one of three categories – aligned interest investing, shareholder advocacy investing, and community investing.
Aligned interest investing happens when investments are made in companies and governments that demonstrate and support values of importance to the investor. These values can include religious, moral, environmental, and human rights values.
Shareholder advocacy investing means that investors will actively influence corporate decisions to ensure that the decision debates and the decisions themselves seriously consider the investor’s SRI goals.
Community investing happens when investments are made in communities, around the world, that have poor access to capital and unmet social needs. Community investments typically support important local services like healthcare, housing, education and child care.
4. Socially Responsible Investing is Large and Growing Fast
The US SIF Foundation’s 2016 Report on Sustainable and Responsible Investing Trends summarizes what is happening in SRI.
The report counts money managers and institutions that apply various environmental, social and governance (ESG) criteria in their investment analysis and portfolio selection or file shareholder resolutions on ESG issues at publicly traded companies
Using these definitions, $8.7 trillion USD, or one out of every five dollars under professional management in the United States was invested according to socially responsible investing strategies. The segment is growing rapidly, reporting 2016 assets under management (AUM) 33% higher than 2015.
5. Most SRI Investors Seek Multiple Goals
Many socially responsible investments seek multiple goals. The 2016 US SIF Report quantifies the magnitude of these investments (“assets under management or “AUM”).
- Environmental investment criteria apply to $7.8 trillion in AUM
- Climate change criteria apply to $1.4 trillion in AUM
- Social criteria, including conflict risk, equal employment opportunity and diversity, and labor and human rights, apply to $7.8 trillion in AUM.
- Governance criteria apply to $7.7 trillion in AUM.
- Product-specific criteria, such as restrictions on investment in tobacco and alcohol, apply to $1.97 trillion in AUM.
6. Rapid ESG Fund Growth Raises Questions
Rapid growth in the category attracts interest and invites questions about whether some money managers are really incorporating ESG factors in their investing or just using the label for marketing purposes.
A number of money managers report that they incorporate ESG factors, but do not disclose the specific criteria used, leaving unanswered questions about actual practices.
Something to consider. “Governance criteria” applied to $7.7 trillion in 2016 AUM, twice as much as two years earlier. Any money manager can claim socially responsible activity by participating in the act of corporate governance and simply vote their shares. An investor really wants to know how that money manager is influencing improvements in corporate governance.
Interested investors should discuss socially responsible investing with a financial advisor.