Understanding Socially Responsible Investing
Today’s consumer is more is more socially conscious than ever. We are continuously evaluating our purchases and the businesses we purchase from to ensure they align with our values. It doesn't matter whether it's the airline company we fly with or the shoes that we buy, the lowest price doesn't always win.
The same goes with investing.
When we hear a term like responsible investing, sometimes we think about philanthropy or supporting the community. Kind of like supporting the local neighbourhood kid’s lemonade stand — really no tangible benefit outside of delicious, freshly squeezed (let’s face it, store bought) lemonade.
Or we think of investing in something that supports a company committed to saving the rainforest. Although the latter can certainly be a part of responsible investing, SRI expands across several areas of social responsibility beyond just environmental.
We are also seeing responsible investing increase in popularity especially amongst young investors who believe that their money can have a positive impact on the world around them. In the last three years, there’s been a 37.8% increase in responsible investing according to RIA. Sorry, another acronym: RIA stands for Responsible Investment Association.
Socially responsible investing (SRI) — occasionally known as responsible investing, ethical investing or sustainable investing — is an increasingly popular way to approach investing. But what does it mean? How does it work? And more importantly, how do you know you're investing in organizations that actually share your values?
Understanding the fundamentals of a values-based approach to investing and how it's changed over the last decade will help you make more informed decisions about the kinds of companies that you choose to include in your portfolio.
What is Socially Responsible Investing?
To put it simply, SRI is a type of investing that allows investors to make money while also making a difference — aligning values with investments.
Socially responsible investments reflect the type of product or service a business provides, the values the company follows and how it conducts itself both publicly and privately.
For example, SRI portfolios would typically exclude companies that are connected to “sin-stocks” — things like tobacco, weapons, gambling or deplorable human rights practices — while including companies that engage in efforts like social justice, environmental sustainability and diversity and inclusion.
Related Reading: The Complete Guide to TFSAs
How are companies held accountable?
An important acronym to note from an accountability standpoint is ESG. ESG stands for environmental, social and governmental. They are the three primary factors that helps determine whether a company is deemed as socially responsible. In addition, fund management firms may use some of the following tactics to hold companies accountable:
- Dialogue. Participate in discussions with companies on important issues while providing feedback and constructive criticism to enhance ESG ratings.
- Shareholder Engagement. If more action is needed, fund management firms can file a shareholder resolution to be voted on at the company's annual general meeting.
- Proxy Voting. Engage in company voting processes on your behalf to promote sustainability.
- Public Policy and Standards. Support public policy changes to encourage action in industries and economies.
- Research. Investigating industry trends, potential risks as well as any positive or negative media attention to offer valuable insight into shareholder views and ethical actions of a company.
- Removal. Ultimately, if a company fails to adhere to the ethical standards that are in place, fund management firms can remove companies from ethical funds investment lists.
Is Socially Responsible Investing worth it?
Socially responsible investing allows you to look beyond profits while keeping your family’s investment goals at the forefront.
Investors no longer have to pick between their conscience and their pocketbook when choosing how to invest. In fact, many studies have shown companies that have higher scores in their environmental and social practices are on par and in some cases outperforming traditional funds.
There are also more options now. Over the last several years, numerous socially responsible exchange-traded funds (ETFs) have popped onto the market.
An ETF is an investment fund that holds several types of assets such as stocks or bonds. It is essentially a way to diversify your socially responsible investment by investing in several companies instead of only one. These available ETFs are well-diversified, accessible and affordable to everyone.
First, it’s important to identify the issues you care about. For example, you may be concerned with animal exploitation or green energy above other social issues. Let your advisor know about these issues when going through the process of selecting your investments.
Also, there may be some companies that are deemed socially responsible in some areas, but not others. For example, a fossil fuel or energy company may be included in certain ESG portfolios because of their commitment to good governance and social practices. This is where it becomes important to do a little bit of research and ask the right questions to ensure that your portfolio matches your needs.
With all that said, you’re not alone in your quest to invest responsibly. Talk to your advisor. They know the products and fund companies inside and out and will be able to help you select a suitable investment that considers both your social desires and investment goals.