More and more people are choosing investments that align with their values and ethics. Because of this, socially responsible investing (SRI) has become increasingly popular.
This investment strategy focuses on generating financial returns whilst also considering environmental, social, and governance (ESG) criteria.
But what exactly is SRI, and how does it differ from ESG investments? And what are the potential benefits of SRI investments? That’s what we’ll be exploring in this blog post.
Read on to learn more about socially responsible investing, including the benefits and different types. We’ll also be discussing how to build a socially responsible investment portfolio.
Overview:
- Socially responsible investing (SRI) combines ethical values with financial goals.
- It excludes harmful industries and supports companies with strong ESG practices.
- SRI can include mutual funds, ETFs, impact investments, and even art.
- Key goals include long-term sustainability, positive social impact, and financial return.
What is Socially Responsible Investing?
Socially responsible investing (SRI) is an investment approach that includes environmental, social, and governance (ESG) factors in the decision-making process.
Unlike traditional financial strategies that solely focus on financial returns, SRI aims to generate positive social impacts alongside financial gains.
This approach considers various ESG criteria when choosing investments, including factors such as:
- A company's carbon footprint
- Labour practices
- Board diversity
- Community engagement
SRI investment is all about aligning your financial goals with your ethical principles by supporting companies or investment avenues that demonstrate responsible behaviour and ultimately make the world a better place.
Examples of Socially Responsible Investments
| Investment Type | Example | Social Impact |
|---|---|---|
| Mutual Fund | Parnassus Core Equity Fund | Screens fossil fuels and unethical labour |
| Impact Investment | Microfinance in developing nations | Supports entrepreneurship and economic growth |
| Community Investment | Local credit union loans or CDFIs | Strengthens underserved communities and funds local projects |
| Art Investment | Supporting underrepresented artists | Promotes cultural preservation and diversity |
1 - Mutual Funds and ETFs
Instead of opting for any profitable mutual funds and exchange-traded funds (ETFs), why not invest in socially responsible companies instead?
Socially responsible mutual funds and ETFs can give you access to diversified portfolios of companies that meet certain criteria.
These funds typically have certain screening processes that excuse companies involved in controversial industries such as weapons, fossil fuels or tobacco.
2 - Impact Investing
Next, we have impact investing. Impact investing focuses on measurable social and environmental benefits whilst considering financial returns too. This approach involves investing in companies, organisations, or projects to create positive social or environmental impact.
3 - Community Investments
Community investments involve allocating capital to projects or initiatives that benefit local communities. This could include investment avenues such as:
- Affordable housing developments
- Renewable energy projects
- Small business financing in underserved areas
This can be a great way to make a difference in your local community whilst reaping the financial benefits.
Is Art A Socially Responsible Investment?
Yes – art can be considered a socially responsible investment. Here’s why:
- Art can contribute to cultural preservation. When you invest in art, you are supporting artists and their communities.
- When you invest in local artists, you are contributing to creative expression and their cultural heritage.
- Art investments can have positive social impacts by supporting diversity and inclusion within the art world. Investing in art from underrepresented groups or regions can help to shed light on diverse voices and narratives. In turn, this can promote inclusivity and boost representation.
- Art investments can contribute to the economy by supporting local economies and potentially boosting tourism. Art fairs, galleries and other attractions attract a range of visitors from around the world, generating revenue and opportunities for local businesses.
Overall, art investment can not only offer financial returns but can give you the opportunity to support local artists – making it a socially responsible investment choice.
Learn more about the world of art investment here – or check out this page for personalised advice.
SRI vs ESG vs Impact Investing
| Approach | Focus | Key Feature |
|---|---|---|
| SRI | Ethical exclusion | Avoids harmful industries |
| ESG | Sustainability performance | Considers ESG ratings in decision-making |
| Impact Investing | Measurable outcomes | Prioritises social/environmental impact |
SRI Investment Strategies
Here are some of the most common SRI investment strategies:
1 - Negative Screening
This strategy involves avoiding adding certain companies (or sectors) to your investment portfolio because they don't match your ethics. For example, you might avoid industries that have a negative social impact such as firearms or tobacco, or companies involved in human rights violations. Negative screening can ensure your money isn't supporting practices that you consider unethical.
2 - Positive Screening
Instead of just avoiding bad companies, positive screening involves actively choosing companies with high environmental, social, and governance (ESG) scores. This might include investing in businesses with diverse teams, low carbon footprints, or ethical supply chains. Positive screening rewards and supports companies that consider ESG.
3 - Thematic Investing
Thematic investing involves choosing your investments based on specific social or environmental themes. For example, you may choose to invest in areas such as clean technology, affordable housing, or renewable energy. This approach allows you to target areas you care about.
4 - Shareholder Advocacy
This approach involves using your ownership stake in companies to advocate for change. This means engaging with company leaders, voting on key issues, and filing resolutions. This might involve addressing climate change, diversity, and labour practices. It involves making a change from within a company.
Pros and Cons of Socially Responsible Investing
| Pros | Cons |
|---|---|
| Aligns with your personal values | May limit your investment options |
| Contributes to positive societal change | ESG data can be inconsistent |
| Potential for long-term outperformance | Might involve more research and monitoring |
So Why Invest Responsibly?
Aligns With Your Values – SRI allows you to align your investment portfolio with your values and beliefs. When you support companies or individuals that have a positive impact on the world, you can feel good knowing that you too are contributing to this.
Positive Social Impacts – When you invest in companies while considering social responsibility, you are contributing to positive social outcomes yourself. For example, you may be contributing to environmental sustainability, or encouraging diversity and inclusion. Likewise, investing in socially responsible companies could also support ethical labour practices, whilst still making a profit.
Long-Term Financial Performance – In many cases, companies with ESG practices actually outperform other companies in the long term. This makes them a great investment. When you consider sustainability factors, you can reduce certain risks and potentially enhance your financial returns over time.
What are the Goals of SRI?
- To align your investments with your personal (or institutional) values
- To promote corporate responsibility
- To support social and environmental change
- To influence corporate policies
- To achieve financial returns whilst doing all of the above
How to Build a SRI Portfolio
Building an SRI portfolio begins with identifying the issues that matter most to you, whether it be climate change, diversity or human rights. Aligning your investments with your values will make it easier to make investment decisions.
If you’re exploring mutual funds or ETFs, look for those that clearly outline their ESG criteria and performance. Consider fees, diversification, and past performance to find the right fit for your goals.
Be sure to diversify your portfolio across different asset classes and sectors. This can reduce overall risk and boost your returns. Review your portfolio regularly to ensure it still aligns with your values (and financial goals!).
Want to begin investing in art? Check out our originals collection today to get started.
