What Does Responsible Investing Look Like?
It goes without saying that when it comes to investing, you’re looking for a good return on your investment. But what if you also want to invest in a way that does some good in the world?
Socially responsible investing, also known as responsible investing (RI), refers to ethically aligned investment strategies that yield positive personal and social returns, not just financial rewards. For many individuals, true financial literacy is founded on aligning personal values and a commitment to specific issues with sound investing designed to maximize profit.
With RI, a desire to promote social change or support certain cultural issues exists side-by-side with a desire to financially benefit from investing. RI can address causes such as diversity, systemic racism, climate change, equal compensation, animal welfare, and more.
A 2018 Nuveen survey revealed that 81% of individual investors want their investments to make a positive impact on environmental sustainability, 80% believe financial investments should try to make a positive societal impact, and 68% say it’s important to discuss their values, ethics, and causes they believe in with financial advisers.
Speaking The Language Of Socially Responsible Investing
As with all types of investing, socially responsible investing comes with its own set of terms that define the process and the end result. Some of the most commonly used terms include:
Responsible investing (RI): (also known as socially responsible investing) Considers the social implications of a company’s products and means of doing business.
Sustainable investing: Investing in companies that combat climate change and protect the environment.
Ethical investing: Considers the ethical and moral values and religious beliefs of investment entities.
ESG investing: Considers environmental, social, and governance criteria.
Impact investing: Takes into account the benefits and overall effects of a company’s business operations.
Positive screening: Investing in companies that contribute positively to society.
Negative screening: Rejecting an investment opportunity because a company’s products or business is harmful to individuals, groups, or the environment.
Triple bottom line: An investment opportunity that focuses on social and environmental results in addition to turning a profit.
Avoidance vs. Investment
Socially responsible investing is as much about tapping into positive opportunities as it is avoiding negative ones. In the early days of RI, being responsible meant not investing in companies, businesses, and even regions of the world generally viewed as unacceptable. Case in point: Before the end of apartheid, South Africa was seen by much of the world as a country you should not invest in until significant changes in human rights came to pass. Ultimately, the lack of investment resulted in South African leaders rethinking their racial policies.
Some RI investors also avoid “sin” stocks, including alcohol producers, weapons makers, defense contractors, tobacco companies, fossil fuel producers, and certain chemical companies. In addition, RI-focused investors tend to avoid buying into the production of yet-to-be-tapped oil, coal, and natural gas reserves because, in nearly all cases, they can’t claim a low-carbon footprint.
Evaluating Whether A Company Is A Positive Investment For You
Responsible or sustainable investing as a philosophy is all well and good, but do the returns make this type of investing viable? Because of the growing popularity of responsible investing, there’s been a marked increase in available data that allows for comparing how well companies score in terms of environmental, social, and governance (ESG) benchmarks.
According to a Nuveen study, RI indexes perform at about the same level as broad market measures, including the Russell 3000 and the S&P 500, in terms of returns and volatility. Companies such as the financial analytic MSCI and mutual fund analytic Morningstar collect and analyze thousands of data points across key ESG issues. Companies are then rated on a AAA to CCC scale relative to peers, and individual scores in relation to ESG criteria are also tabulated.
Some of the most common environmental ESG factors evaluated by companies include climate change, natural resource management, environmental opportunities, pollution, waste, and company product recycling.
Analysis of social ESG issues includes looking at product liability, labor-management relations, and worker health and safety. Governance factors can also figure into this type of ESG analysis, with studies taking a closer look at tax transparency, management team stability, board diversity, and executive pay.
A 2018 report issued by the trade group Forum for Sustainable and Responsible Investment (USSIF.org) found that “Investors now consider environmental, social and governance (ESG) factors across $12 trillion of professionally managed assets, a 38% increase since 2016.” In October 2019, 178 mutual funds or ETFs were available to individual and institutional investors employing ESG principles offered by companies that belong to USSIF alone.
Those funds span a wide range of asset classes and sectors: domestic stocks to emerging markets, small and large cap, bonds and other fixed-income investments. Because minimum initial investments can start as low as $250 for retirement fund accounts like an IRA, this type of individual investing is easily within reach, making socially responsible investing both practical and promising.