What Is Socially Responsible Investing (SRI) and How Can You Get Started
As a content producer writing about socially responsible investing, I often wonder how well the term “Socially Responsible Investment” is understood by the average investor. It often seems like socially responsible investing, or SRI for short is an “inside term” that outsiders don’t really understand.
So maybe I can help to change the conversation. Maybe.
Let me start by congratulating you on deciding to become a socially responsible investor. Ethical investing does not trigger poor investment performance. Far from it. Socially responsible investors can make out very well. In the end, your SRI portfolio will do you proud.
And today’s news stories use the term Environmental, Social and Governance (ESG) to describe similar concerns and issues. Over the course of this article, I will look at both of these terms and other similar terms.
Defining Socially responsible investing (SRI)
Socially Responsible Investing (SRI) is a strategy or philosophy that encourages investors to consider their personal outlook and moral code when they make an investment decision.
And as I have already pointed out, SRI is not the only term used to describe this strategy. Other terms that may come up when you talk about or research SRI include:
- Values Investing
- Environmental, Social and Governance (ESG) investing
- Sustainable Investing
- Responsible Investing
- Social Investing
- Impact Investing
- Positive investing
- Community Investment
- Ethical Investments
The list goes on, but I trust that the concept is clear. When you try to consider your ethical outlook while developing your investment strategy, you are practicing SRI.
While some of these terms may have particular uses in various contexts, the end goal is similar.
Socially Responsible Investment (SRI) isn’t a new concept. Really…
On your way here, you have probably seen how much attention is being paid to Environmental, Social and Governance (ESG) investment strategies by some states in the American Deep South lately. Many of the current news and investment stories use the term Environmental, Social and Governance (ESG) to describe investment funds that want to review corporate issues beyond today’s balance sheet.
In this setting, I think you could pretty much substitute Socially Responsible Investing (SRI) for ESG and get the same feedback.
Places like Alabama, Texas and Florida are complaining that some investment firms are using ESG to “attack our way of life.” They want to pretend it’s new, but it’s not.
Or at least that is what it seems like to me.
Using investments and purchasing power to try and influence broader social ills is not a new thing.
In fact, I wrote about this when I looked at the abolitionists’ campaign to end the slave trade in the late 1800s. We have seen these types of efforts repeated throughout history, such as:
- The suffragettes used economic and public pressure techniques to get women the right to vote; and
- The anti-Apartheid movement tried to free Nelson Mandela and overthrow the whites-only government in South Africa.
These are just two examples… No doubt, there are many more. Now, one of the most extensive ongoing campaigns centers on environmental sustainability practices. And this is where the pushback is being generated.
To place this in a broader historical context, I like to point out that the term “boycott” was coined to describe efforts to protest English landlords starving out their Irish tenants during the Irish Potato Famine. One of those landlords was named Boycott.
So, what is environmental, social, and governance (ESG) investing?
As I already have pointed out, ESG and SRI are similar concepts. SRI is an older term that focuses on the ethical decisions involved in investing, and ESG is a more recently developed term.
ESG – sometimes referred to as environment, social and corporate governance – tries to find metrics to quantify the environmental, social and corporate governance efforts each company has made. These efforts have met with middling success. Different observers have ended up giving the same stock wildly different scores – all based on how each observer has decided to construct their scale.
This adds a wrinkle to the conversation, but it does not make it meaningless. I think it’s still worth the effort.
Critics of ESG like to tell us that using “touchy-feely” criteria in a corporate analysis is stupid. They want you only to consider financial performance. After all, that’s what traditional investing strategy is all about, right?
Well, actual studies have shown that this isn’t the case. It’s not that simple. Where some will point to supposed ESG risks attached to this strategy, there are empirical studies that show that improved ESG scores parallel superior stock performance.
Let’s take corporate governance as example. Analysis of questionable or narrow board membership can act as a corporate early warning system. When individual companies are tagged for poor corporate governance, that indicates a more tremendous potential for significant fallout from uncovered corporate scandals.
Negative screening is a process for deciding not to invest in specific individual stocks. It’s a way of taking into account the possibility that “where there’s smoke, there’s fire.”
And when the fire does actually break out, stock values will suffer.
Governance risks really do impact a company’s long-term potential. For instance, questionable business practices at Southwest Airlines are now haunting the company’s long-term health and well-being. Southwest has been accused of prioritizing dividend returns and short-term financial gain over the company’s long-term potential.
By refusing to invest in updated software for tracking plane usage and staff allocation, Southwest was unable to handle bad weather during the busy holiday season. This left customers stranded and unable to get to their destinations. A pretty expensive and unpopular way to run an airline, eh?
But what about “Greenwashing”? That sounds like a big problem.
Greenwashing is getting a lot of attention these days. And yes, it’s a problem.
Let’s start by defining it. Investopedia defines Greenwashing as:
The act of providing the public or investors with misleading or outright false information about the environmental impact of a company’s products and operations.
Yes, there are times when a company claims a “cleaner” corporate profile than they deserve or “emphasize sustainable aspects of a product to overshadow the company’s involvement in environmentally damaging practices.”
Individual investors and consumers may want to investigate claims like this more closely. It can be challenging, but it will end up being worth your while.
And along these lines, some criteria are subject to interpretation. As I already pointed out, different groups can interpret the same information in different ways. In the end, it is not a simple process, and we have to try our best and accept the fact that we are human.
How to build a socially responsible investing portfolio
There are many different ways to build your socially responsible investing portfolios. To figure out you’re going to do it, you could start by asking yourself:
- Why are you switching to socially responsible investments?
- What is going to shape your investment decisions?
- Where can you make socially responsible investments?
- Who is going to help you manage your socially responsible investment portfolio?
- How much of your portfolio are you going to invest using an SRI investing strategy?
- When do you want to start investing?
Why are you switching to socially responsible investments?
As you start this journey, you need to figure out why you’re doing it. Is this something that you have always wanted to do? Or is something new in your life triggering this change of perspective? Maybe a change in your financial life has given you the opportunity to look at your investment strategy from a new perspective.
All of this will help you decide how to proceed. But please do keep going. You’ll be glad you did, and the world around you will appreciate it too.
What is going to shape your investment decisions?
So, you feel a sense of social responsibility, and you want your investment dollars to benefit your community and your world. Well, take comfort. And relax, it’s a good thing.
There are investment options that let you invest in developing countries and others that offer general community investing opportunities. Go ahead and find yourself some decent, socially responsible funds. Don’t worry. They’re out there.
Or maybe you’re worried about climate change, and you want to make sure your shiny new SRI portfolio doesn’t include fossil fuels. If so, then you can look for mutual funds investing in solar energy or wind turbines.
Where can you make Socially Responsible Investments?
There are lots of options for where you make your investments. Just like regular investing, you can look into mutual funds and exchange-traded funds that offer ESG or SRI portfolios. Just remember, like the corporations they invest in, these ESG Funds and SRI funds could be greenwashing you. Due diligence in all financial matters is required.
Who is going to help you manage your socially responsible investment portfolio?
If you already have a financial advisor, you’ll need to figure out if he is able to make the shift with you. If you’re really lucky, they’re the one that suggested the change.
But if you need to, you may need to go looking for other fund managers or money managers.
How much of your portfolio are you going to invest using an SRI investing strategy?
At first, you might think, “That’s a silly question – all of it, of course.” Maybe that’s where you want to get to, and maybe it isn’t. But remember, it isn’t all or nothing.
You decide how far along you want to go on the road to SRI. The most crucial question is, after I do this, will I be able to sleep at night?
When do you want to start investing?
Along with “how much” is “when.” That’s sort of obvious, right. But your decision on timelines isn’t – evident, that is.
Relax. This is a lot to take in. Give yourself the time you need to feel comfortable with it because you need to be still able to sleep at night. Right?