Socially responsible investment (SRI) is an investing strategy that is conscious of the impact products and services have on society and the environment.
The investments are made through companies involved in long-term ventures that are beneficial to society, such as producing clean energy. SRI is also done through the exchange-traded fund ETF, also referred to as a socially conscious mutual fund.
Overview of Socially Responsible Investment SRI
When planning to invest in a project, it’s imperative to consider whether it meets the ESG criteria. ESG stands for environmental, social, and governance. It comprises standards that go beyond the financial factors used to determine whether a project is profitable.
The ESG criteria’s primary goal is to guide investors and impact investing when evaluating project feasibility. It helps determine the holistic impact of the project on society and the environment. Here is a breakdown of the factors that the ESG criteria focus on during the analysis.
Environmental
This facet considers a project’s current and future impacts on the environment. It encompasses several factors, namely;
- Deforestation
- Biodiversity
- Climate change and carbon emissions
- Waste management
- Energy efficiency
- Water scarcity
- Fossil fuels
Social
It evaluates how the project impacts relationships and the people directly or indirectly affected by it. Whether they have billion in assets or not, it looks at the following factors;
- Data protection and privacy
- Customer satisfaction
- Human rights
- Community relations
- Employee engagement
- Gender and diversity
- Labor standards
Governance
This facet refers to how the company is managed. The factors it considers include;
- Board composition
- Lobbying
- Executive compensation
- Political contributions
- Audit committee structure
- Whistleblower schemes
Social and corporate governance ensures that projects don’t only benefit the investors and stakeholders. They ensure that the project managers consider society’s needs and expectations. It also ensures that companies abide by stipulated rules, regulations, and business practices.
Over the last five years, ESG investments have increased thanks to the widespread adoption of mutual funds and bond ETFs. These investment vehicles give retail investors access to hundreds if not thousands of companies in different sectors, such as green technology.
Familiarizing yourself with various industry sectors and ESG criteria to make informed decisions is essential. The analysis will give you a deeper understanding of the project. It will also enable you to develop robust ways of mitigating the risks.
Two of the primary goals of socially responsible investment SRI are financial gain and social impact. Note that even if an investment is categorized as socially responsible, there is no guarantee for high financial returns. When investing in socially responsible ETFs, you should also consider their financial outlook to determine the project’s social value.
How to Create a Socially Responsible Investment (SRI) Portfolio
Contrary to popular belief, creating a socially responsible investment portfolio is not difficult. The first thing you should do is list the values the projects should meet.
Create your SRI portfolio in three simple steps.
1: Determine how much are you willing to invest
Knowing how much you are willing to commit to the project will enable you to weed out investments that don’t match your interests and goals. Take time to evaluate how each company on your list is committed to the ethical practices that matter to you.
You can use Robo-advisors to narrow down ideal investment opportunities. Robo-advisors rely on algorithms to create investment portfolios for investors. The three principal portfolios they create are:
- Betterment: This portfolio has three facets; Broad impact, Climate Impact, and Social Impact.
- Wealthfront: This is a pre-defined socially responsible portfolio that is customizable.
- Merrill Edge Guided Investing: It allows investors to invest in an ESG portfolio. You can also request restrictions to be placed on some of the ETFs.
2: Register an Investment Account
Create a personal or brokerage account to buy and sell investments with ease. Compare and contrast the brokerages to find one with the most rewarding socially responsible investing opportunities and potential for high ROI.
3: Set Goals and Objectives
List what is important to you and the requirements that an SRI must meet before investing. Take a closer look at the social and governance ESG report to get a clearer perspective of the company before investing.
With your brokerage account now set up, evaluate the available opportunities. Consult a reputable independent research firm to understand the stocks and mutual funds better.
Let’s shift gears and look at two investment paths you can take.
Individual Stocks
Individual stocks should be between 5% and 10% of your SRI portfolio. If a company listed has billions in outlets under management and shows strong signs of growth, go ahead and include it in your portfolio. Some of the factors that you should consider when evaluating a company’s individual stocks are;
- Diversity of the board of directors
- Revenue and net income
- Availability of reports
- Employees job satisfaction
- Work culture
Mutual Funds
Mutual funds present an easy and fast way of diversifying your socially responsible investment portfolio. They encompass assets that meet the criteria set up by the fund manager. The best brokerages have screening tools that enable them to recommend the best investment opportunities to investors.
Is there a Difference between Sustainable Investing and ESG?
Most people use the terms ESG and sustainable investing/socially responsible investing interchangeably. There is a glaring difference between the two terms.
ESG investing involves investors considering the environmental, social, and governance opportunities and risks associated with the project. The ESG criteria help investors to identify sustainable projects that meet their desired values and expected financial returns.
On the other hand, sustainable or socially responsible investing focuses mainly on a project’s ability to impact or change society positively. The decision-making process focuses mainly on moral values and financial returns. The financial returns are considered after the evaluation of moral values.
Final Thoughts
Socially responsible investment is a sure way of ensuring that your fund investing aspirations don’t harm the environment and society. Start building a portfolio that is both tax efficient and socially responsible in just three steps! Join community development financial institutions (CDFIs) such as loan funds, venture capital funds, or bank holding companies. With your investment choices made from mutual funds, ETFs, stocks bonds — you’ll be on the road to an impressive portfolio tailored to your individual needs.
