Making a Positive Impact on Society and Your Investments
Considering environmental, social and corporate governance (ESG) criteria in your investment decisions is the basis of Socially Responsible Investing (SRI). With SRI, the goal is to generate attractive long-term financial returns and have a positive impact on society. If you’re looking to align your social values with your investment portfolio, then an SRI strategy may be worth a closer look.
What is SRI?
SRI is broadly defined as the integration of social and environmental principles into the selection and management of investment portfolios. A large number of asset management firms and pension plans incorporate SRI into their investment selection process. According to the Responsible Investment Association, more than $1 trillion of investments in Canada follow some form of SRI discipline. This includes mutual funds as well as pension plans such as the Canada Pension Plan and Ontario Teachers’ Pension Plan.
SRI strategies can incorporate screens and research disciplines to identify firms that score well for their social impact and avoid firms that score poorly. In this framework, each investment is evaluated based on three specific factors: environmental, social and corporate governance (ESG). Typically, this process leads SRI portfolios to exclude firms with significant revenues from the production of tobacco, alcohol, nuclear energy, gambling, weapons and pornography. Some proponents of SRI go a step further and push for change by engaging companies through discussions with management, filing shareholder resolutions and using shareholder votes in accordance with SRI principles.
Environmental, Social and
Corporate Governance Factors
An environmental analysis typically looks at the steps and procedures taken by a company to prevent pollution and waste, reduce greenhouse gas emissions and improve overall environmental practices. However, this is not necessarily “green” investing, which tends to focus on producers of renewable energy products like solar, water and wind. Core to many SRI portfolios is the idea of “best-in-sector” where even a company in the oil and gas sector can qualify as acceptable if it follows environmental best practices for that industry, or responds to environmental challenges better than its peers.
Social analysis looks at factors dealing with the workplace environment including issues related to human rights, diversity, health and safety and labour relations.A company’s products are also reviewed with respect to safety and quality. Social aspects like community involvement and philanthropic activities are also considered.
Governance reviews seek to determine whether the interests and goals of company management are aligned with shareholders. This is accomplished by evaluating executive and board compensation schemes, management accountability and shareholder rights.
If you are looking to adopt a socially conscious investment approach, SRI can help to align your investment portfolio with your social values without compromising your potential long-term returns.