Although it is not a new movement, socially responsible investing, otherwise known as ethical investment, has risen dramatically in recent years.
As a community we have seen many popular changes, including the rise of electric vehicles, the increasing popularity of veganism and the ban of single use plastic bags and plastic straws – all in the name of limiting our footprint on the world in which we live in.
These movements also have a large influence on the companies and industries which investor feel are “socially responsible” to invest in.
What is Socially Responsible Investing?
Socially responsible investing, or ethical investing, is the practice of investing in companies and funds that have positive social impacts or high ESG standards.
Socially responsible investments tend to mimic the political and social climate of the time and is a strategy that investors use to make a positive impact (or maybe just excluding those who make a negative impact), while also creating an investment return.
This may manifest in fund managers eschewing investments in companies that produce or sell addictive substances or activities (like alcohol, gambling, and tobacco) in favor of seeking out companies that are engaged in social justice, environmental sustainability, and alternative energy/clean technology efforts.
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.
Socially Responsible Investing is Growing in Popularity
Socially responsible investors have the power and influence to encourage and push firms to adopt more socially responsible practices through their investment choices.
If you, the investor, are conscious about the values that are important to you and the companies/industries that you would like to support, then you can use your investment dollars to “vote” for the companies you would like to see succeed, by investing in them.
Investors should keep in mind that socially responsible investments are still investments and be sure to weigh the potential for return in their decisions.
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.
Morgan Stanley. (2021). Sustainable Signals: Individual Investors and the COVID-19 Pandemic. Institute for Sustainable Investing. https://www.morganstanley.com/assets/pdfs/2021-Sustainable_Signals_Individual_Investor.pdf
Oehmke, Martin and Opp, Marcus M., A Theory of Socially Responsible Investment (April 26, 2022). Swedish House of Finance Research Paper No. 20-2, Available at SSRN: https://ssrn.com/abstract=3467644 or http://dx.doi.org/10.2139/ssrn.3467644