Socially Responsible Investing

Overview of Socially Responsible Investing

Socially responsible investing (SRI), also known as social investment, is an investment that is considered socially responsible due to the nature of the business the company conducts. A common theme for socially responsible investments is socially conscious investing. Socially responsible investments can be made into individual companies with good social value, or through a socially conscious mutual fund or exchange-traded fund (ETF). Socially responsible investing provides a mechanism for investors to align personal values with investment objectives. This type of investment strategy may help to provide important societal or environmental benefits through companies with a focus on effectively utilizing environmental resources, fostering safer working conditions, or improving corporate governance, to name a few.

The Global Stage

SRI has increasingly gained in popularity. According to a 2019 Morgan Stanley survey, 85% of individual investors are interested in sustainable investing, up from 75% in 2017.
The options available to those investors have also grown: Investment research company Morningstar says there were 303 sustainable open-ended mutual funds and exchange-traded funds in 2019, up from 111 in 2014.
There are now 5 times as many sustainable funds in the United States as there were a decade ago, and 3 times as many as there were five years ago.
Asset managers globally are expected to increase their ESG-related assets under management (AuM) to US$33.9tn by 2026, from US$18.4tn in 2021.
In the next 20 years, it is expected that SRI will be a $50
trillion market/industry.
With a projected compound annual growth rate (CAGR) of 12.9%, ESG assets are on pace to constitute 21.5% of total global AuM in less than 5 years.
What’s more, a majority of institutional investors, 60%, reported that ESG investing has already resulted in higher performance yields, compared to non-ESG equivalents.
As of 2020, 88% of publicly traded companies, 79% of venture and private equity-backed companies, and 67% of privately-owned companies had ESG initiatives in place.
76% of consumers say they will stop buying from companies that treat the environment, employees, or the community in which they operate poorly

A Solution Oriented Approach

In recent history, socially conscious investing has been growing into a widely-followed practice, as there are dozens of new funds and pooled investment vehicles available for retail investors. Mutual funds and ETFs provide an added advantage in that investors can gain exposure to multiple companies across many sectors with a single investment. However, investors should read carefully through fund prospectuses to determine the exact philosophies being employed by fund managers, along with the potential profitability of these investments.

There are two inherent goals of socially responsible investing: social impact and financial gain. The two do not necessarily have to go hand in hand; just because an investment touts itself as socially responsible doesn’t mean that it will provide investors with a good return and the promise of a good return is far from an assurance that the nature of the company involved is socially conscious. An investor must still assess the financial outlook of the investment while trying to gauge its social value.

As awareness has grown in recent years over global warming and climate change, socially responsible investing has trended toward companies that positively impact the environment by reducing emissions or investing in sustainable or clean energy sources. Consequently, these investments avoid industries such as coal mining due to the negative environmental impact of their business practices.

One example of socially responsible investing is community investing, which goes directly toward organizations that both have a track record of social responsibility through helping the community, and have been unable to garner funds from other sources such as banks and financial institutions. The funds allow these organizations to provide services to their communities, such as affordable housing and loans. The goal is to improve the quality of the community by reducing its dependency on government assistance such as welfare, which in turn has a positive impact on the community’s economy.

Fluid Ice Foundation Research Summaries

Socially Responsible Investing

Raj Mehta (Founder & CEO, Fluid Ice Foundation)

A socially conscious investment technique known as socially responsible investing (SRI) aims to both produce a positive financial return on investment and also generate beneficial social impact. The terms “impact investing,” “value-based investing,” “sustainable investing,” and “ESG (Environmental, social, and governance) investing” are all used to describe socially conscious investment techniques. Since everyone has unique ideals, there are many different ways that investors define and choose to invest in SRI. SRI investing can be made directly in companies with strong social values or indirectly through socially conscious mutual funds or ETFs.

SRI-interested investors choose their investments based on more than simply performance; they also consider the company’s revenue stream and business practices in relation to their values. Depending on one’s individual moral and ethical values, socially responsible investments can differ from person to person. An investor who cares deeply about the environment is likely to have assets in wind and solar enterprises and other green energy sources in his portfolio. Other investors may support social concerns by investing in women- or African-American-owned businesses or those owned by other minorities. As a result, their portfolios may contain investments in these types of businesses, that align with their values. This could also mean that investors may divest from companies that do not share their beliefs/values.

SRI is still rather new, but it’s growing in acceptance. Young investors have become more concerned in recent years about problems like climate change and environmental sustainability. Socially conscious American mutual funds received around $70 billion in inflows in 2021 alone, a 36% increase over 2020. Investments based on environmental, social, and governance (ESG) criteria reached a record $12.2 billion by the end of 2020. A 2019 Morgan Stanley survey found that 85% of individual investors, up from 75% in 2017, were interested in sustainable investing. These investors now have more options than ever before: There were 303 sustainable open-ended mutual funds and exchange-traded funds in 2019, up from 111 in 2014, according to investment research firm Morningstar. In the next 20 years, it is expected that SRI will be a $50 trillion market/industry.

ESG Investing

Environmental, social, and governance (ESG) investing is the most common type of SRI investment. When ESG investing, investors look for businesses that exhibit/adhere to each of these three elements/components. Additionally, several third-party organizations have developed ESG scores for companies/businesses, to make it easier for investors to identify the same. Bonds, mutual funds, and exchange-traded funds (ETFs) that adhere to ESG principles, in addition to stocks, may also be preferred by investors who support sustainable investing or socially responsible investing.

Environmental: Sustainability and a company’s environmental impact are examples of environmental factors. In order to reduce carbon emissions, clean/green energy are the main priorities. For investment purposes, high pollution businesses are avoided.

Social: Investing in businesses that support racial equality, affordable housing, animal rights, human rights records, customer satisfaction, labor policies, community involvement, etc. are all examples of social aspects. A company is also well regarded when all employees receive competitive pay and work in pleasant conditions.

Governance: Political activities, diversity in leadership and the board, and the wage disparity between executives and non-executives are all variables in corporate governance. Poor ratings are given to companies with highly paid executives and relatively low-paid non-executive staff.

The majority of sustainable funds outperformed non-ESG strategies across one, five, and ten years, according to an analysis of 745 European funds. According to Morningstar, investors are becoming more interested in socially conscious investment techniques. The report claims that there are now 5 times as many sustainable funds in the United States as there were a decade ago, and 3 times as many as there were five years ago. There are several SRI opportunities, including the increasing number of equities, bonds, and other financial instruments that adhere to ESG principles.

SRI is extremely important, since investing with a social impact bent-of-mind enables you to not only generate profit, but also make an impactful/beneficial difference in society. If one makes a special effort to concentrate on responsible investing, there are numerous ways to develop an SRI portfolio based on your investment goals and desires.