socially responsible investment

What Is a Socially Responsible Investment?

What Is a Socially Responsible Investment (SRI)?

According to Investopedia, socially responsible investing (SRI), also known as social investment, is an investment that is considered socially responsible due to the nature of the business the company conducts. Common themes for socially responsible investments include socially conscious investing. Socially responsible investments can be made into individual companies with good social value, or through a socially conscious mutual fund or exchange-traded fund (ETF).

KEY TAKEAWAYS

  • Socially responsible investing is the practice of investing money in companies and funds that have positive social impacts.
  • Socially responsible investing has been growing in popularity in recent history.
  • Investors should keep in mind that socially responsible investments are still investments, and be sure to weigh the potential for return into their decisions.
  • Community investing is a type of investing where the return is measured on community impact rather than monetary return.
  • Socially responsible investments tend to mimic the political and social climate of the time.

 

what is socially responsible investingUnderstanding Socially Responsible Investment (SRI)

Socially responsible investments include eschewing investments in companies that produce or sell addictive substances (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.

In recent history, “socially conscious” investing has been growing into a widely-followed practice, as there are dozens of new funds and pooled investment vehicles available for retail investors. Mutual funds and ETFs provide an added advantage in that investors can gain exposure to multiple companies across many sectors with a single investment. However, investors should read carefully through-fund prospectuses in order to determine the exact philosophies being employed by fund managers, along with the potential profitability of these investments.

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.

Socially responsible investing has become a more politically polarizing topic due to the fact that the popular vessel by which those invest in socially responsible ways revolves around Climate Change, a cause that is viewed quite separately by different political factions.

Special Considerations

Socially responsible investments tend to mimic the political and social climate of the time. That is an important risk for investors to understand, because if an investment is based on a social value, then the investment may suffer if that social value falls out of favor among investors.

For this reason, socially responsible investing is often considered by investment professionals through the lens of Enviornmental, Social and Governance (ESG) factors for investing. This approach focuses on the company’s management practices and whether they tend towards sustainability and community improvement. There is evidence that a focus on this approach can improve returns, whereas there is no evidence for investing success from investing purely on social values alone.

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