Is ‘socially responsible investing’ just a trend, or a profitable and smart way to invest? Here are the basics on what makes an investment socially responsible, and why it’s here to stay.
Are the concepts of making money and making a positive impact mutually exclusive? While people generally want to do good, there is also the desire to maximize returns from investments. That’s where socially responsible investing (SRI) can help, allowing us to prepare for tomorrow while following our conscience.
SRI is quickly growing in popularity among Canadian investors, and according to a 2016 report by the Responsible Investment Association, it accounts for 38% of the Canadian investment industry. Interest in responsible investing strategies has become widespread including from individual investors, pension funds, and asset managers. Assets under administration rose to approximately $1.5 trillion, up 49% over a two-year period ending in 2015.
What is socially responsible investing?
Historically, socially responsible investing started out with religious leaders calling for followers to shun “sinful” companies such as producers of firearm, alcohol and tobacco products. The concept then evolved to include political issues like civil rights, gender equality, and rights for workers. Today, SRI addresses a myriad of complex problems of the modern world. These include cybersecurity and privacy concerns, corporate governance, environmental changes, and social justice.
There are three core factors used to identify and measure the ethical and sustainability impact of a company, known as the ESG criteria: environmental, social, and governance.
Environmental: to measure a company’s environmental impact, the ESG criteria may consider factors such as the type and amount of energy they use in their operations, the waste and pollution that is generated from their production facilities and how disposal is handled, and their use of natural resources and whether the company engages in efforts to replenish these resources where applicable. In addition, the criteria measures the financial impact of environmental risks, and how the company is mitigating those risks.
Social: a company’s social impact speaks to their value system. Does the company promote diversity by providing opportunities for advancement to women and minorities? Does the company give back to their community by partnering with charities, donating a portion of their profits, or encouraging volunteerism? Are their employees treated fairly and provided with a safe working environment? Do they hold their vendors and suppliers accountable to these same standards?
Governance: on top of being environmentally and socially conscious, a company’s accounting and corporate governance are critical factors for an investor to consider. Investors should look for companies that cultivate a culture of compliance and ethical behaviour. Their financial accounting methods should be transparent and compliant with accounting standards. Their leaders, board members, and partners should be free of any conflicts of interest, and they should act honestly and with integrity.
It’s here to stay
SRI is not only about making us feel better in the companies we choose to support. Asset managers cite better returns and less risk in the long run as reasons why to employ SRI strategies. Ideally, responsible management (by companies) both benefits society and is good business practice.
It’s clear that SRI isn’t just a fad. Investors can easily participate by investing in SRI mutual funds and ETFs. As more companies take the initiative to do good while also delivering for shareholders, it’s reasonable to expect the popularity (and performance) of these types of investments to increase.
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