Socially Responsible Investing: Go Green And Make Money At The Same Time

In a world where we’re constantly reminded of the need to take better care of our environment, some investors are making the conscious choice to put their money to work in a way that’s in tune with their personal values and social views. Others are more interested in bringing about social change, in order to leave behind a better world for the benefit of future generations. Different as those approaches might seem, they share a common ground in that they seek to catalyze the shift toward a more economically just and environmentally sustainable world. As environmental and social issues gain more and more importance, socially responsible investing will become even more popular.

Definition of Socially Responsible Investing

Several definitions of socially responsible investing have been offered. Many authors choose to describe it as an investment philosophy that includes non-financial, ethical (e.g., social and environmental) objectives. Others describe it as a process within the context of financial analysis, which takes into account social, environmental, and ethical consequences when selecting retaining, or realizing investments. But maybe the most accurate and comprehensive definition of socially responsible investing is that of Chris Cowton, Dean of the Business School at the University of Huddersfield in the UK. He assumes that “ethical” and “socially responsible” basically are the same, and offers the following definition:

“Ethical investment may be defined as the exercise of ethical and social criteria in the selection and management of investment portfolios, generally consisting of company shares (stocks). This contrasts with standard depictions of investment decision-making in finance textbooks, which concentrate solely on financial return in the form of dividends and capital gains, and risk…”

Growth of Socially Responsible Investing

When it comes to socially responsible investing, the Social Investment Forum (SIF) is pretty much THE reference, and it bills itself as the only national membership association dedicated to advancing the concept, practice, and growth of socially and environmentally responsible investing (SRI). According to Rachel McKnight, a spokesperson for the Forum, shareholder activists (who align their personal and social values with their investment decisions) like knowing that their $2.71 trillion is making a positive difference.

Just to give a measure of the increasing clout of SRI, SIF reported in 2005 that only one out of nine investment dollars in the Unites States was actively invested in socially screened portfolios. That amount represented 11% of the $25.1 trillion in total assets under management by investment managers. From 2005 to 2007, SRI assets increased more than 18%, while those of the broader, professionally managed assets increased less than 3%.

Appeal of Socially Responsible Investing

SRI (which is also defined as sustainable and responsible investing) started gaining traction as an investing alternative in the 1960s, a tumultuous decade that escalated sensitivities to issues of social responsibility and accountability. Concerns regarding the Vietnam War, civil rights and equality for women in the 1960s, broadened during the 1970s to include labor-management issues and anti-nuclear convictions. Then, when citizens around the world witnessed the Bhopal, Chernobyl, and Exxon Valdez incidents, the environment shot to the top of the socially concerned investor’s list. Since then, the climate crisis has awakened investors to opportunities for directing investment capital in other, environmentally-friendly companies.

Many financial advisors appreciate being able to introduce clients to the idea of investing in companies that are attempting to minimize environmental damage or that are developing techniques to improve energy efficiency, recycle industrial wastes and combat global climate change. And their clients like the idea of investing and helping to protect the environment at the same time. So it’s a win-win situation. Socially conscious investors feel a sense of responsibility for the impact their money has in the world. They believe they can make money and also make a meaningful difference by consciously directing investment capital toward enterprises that contribute to a clean and healthy environment, treat people fairly, embrace equal opportunity, produce safe and useful products and support efforts to promote world peace.

Socially Responsible Investing Strategies

Three complementary strategies have proven effective when it comes to actually effecting the concept of socially responsible investing: portfolio screening, shareholder advocacy, and community investing.

Portfolio screening is probably the most well known and common socially responsible investing strategy. It involves simply not investing in those companies that you disagree with, for whatever reason. Let’s say you dislike companies that export jobs overseas. You can avoid investing in them and choose to put your money in companies that are creating jobs in America. If you want to contribute to preserving the environment, you may decide to only invest in green mutual funds. This isn’t always easily done with typical mutual funds, as they own many stocks in companies whose practices would cause you not to invest in them. Screening portfolio holdings offers investors the choice to avoid corporations with poor records on social and environmental issues.

Shareholder advocacy is the influence of a given company by its shareholders to make changes. This could influence a company to stop doing business with a certain entity or a certain way, for example. It aims to positively influence corporate behavior.

Community investing directs capital to people in low income communities or countries. As such, it can help areas or countries in need of investment funds get much needed capital, which is especially helpful since those countries and areas often have trouble accessing funding through traditional channels. This not only spreads good will, but also can be rewarding, as many areas are emerging markets with big potential for investment return.

As a socially responsible investor, it’s up to you to choose your preferred approach and level of involvement.

Socially responsible investing funds have grown at an incredible pace over the past few years. In fact, they’re one of the fastest growing sectors as we’re slowly but surely moving away from just looking at return on investment, and incorporating other elements into our investing decisions. Nevertheless, it’s vital to note that anytime you invest in a particular sector fund or investment area, you do so at the expense of proper diversification, and that’s probably the biggest drawback to socially responsible investing: focusing on just a small area of the market automatically means that you’re taking more risk. Of course, if said sector takes off, you might make a lot of money; conversely, if it tanks, you have little else to fall back on.

Also keep in mind that there can also be sacrifices when eliminating a sector all together. Socially responsible investing techniques typically rule out certain sectors, and those decisions can prove costly in terms of missed opportunities. So before you dive headfirst into socially responsible investing, remember to always consult a professional before implementing your investment plan (socially responsible or not).