Socially Responsible Investing (SRI) or ethical investing can be broadly defined as the integration of social and environmental principles into the investment decision-making process. The Social Investment Organization (SIO), the national non-profit association for the SRI industry in Canada, describes three main components to SRI investing.
1. Screening: Negative screens are based on values-based social criteria and are frequently used to exclude companies such as those involved in tobacco, alcohol or weapons production. Positive screens are used to identify industries that create benefits for investors and the planet, such as alternative energy. Bottom-up screens help identify firms with best-of-sector practices relating to environmental impact, community involvement and employee relations.
2. Shareholder Activism: Instead of simply avoiding problem companies, some SRI investors try to exert pressure to change them. This involves activities such as the use of shareholder resolutions or proxy voting policies.
3. Community and Economic Development: This process looks for companies that are contributing to the well-being of a community by investing in equity vehicles that target community development or serve low-income or disadvantaged groups.
For many investors unfamiliar with SRI, there is the immediate assumption that social benefits come with financial sacrifices - that a portfolio focusing on environmentally sound companies might exclude some of the markets most profitable ones. This assumption is proving to be a myth. It's now becoming increasingly clear that a company's financial performance cannot be separated from its impact on the environment or the people it affects. In other words, companies must operate with the knowledge that decisions they make have an effect on their environment and also their own bottom lines. Socially responsible investing seeks to ensure there is no trade-off between financial performance and social responsibilityand to promote more sustainable companies over the long term.
There are many different approaches to socially responsible investing. Portfolio screening is considered a lower-impact strategy because the change created is limited in scope. The idea behind it is to either seek out companies in sectors or industries that promote certain activities (like green energy) or avoid companies in which poor social or environmental performance could adversely impact the company's financial performance. Most SRI funds apply a selection process to screen out companies that dont meet their investment guidelines and identify companies that are acceptable. Some funds use outside research sources to make these determinations.
The good news is that more and more companies are showing a willingness to respond to concerns and make socially responsible change. Companies are recognizing that the integration of ESG practices is not only good for public relations, but also for the bottom line. The growth of socially responsible investing has helped accelerate that process and allowed the average investor to make change in a meaningful way without ever losing sight of their financial goals.
As an advisor focused on socially responsible investing, Jason would be happy to discuss any questions about SRI you may have.