What Makes an Investment Socially Responsible?
If you’re new to investing and thinking about putting your money to work using an approach that incorporates social or ethical criteria, it’s important to know what types of strategies are available to you and how to differentiate between them.
When we consider the socially responsible investment (SRI) universe, there are five main strategies most often used by investment managers. SRI investors will usually incorporate some combination of these five when picking their investments.
1. Positive Screening. With positive screening, the investor looks for profitable companies that integrate corporate social responsibility (CSR) into their business practices and operations. Typically, this investor wants to see the company actively engaged in the following issues: environmental conservation, human rights, labor rights, fair trade and indigenous rights. This investor may also consider companies whose products or services directly address CSR issues, like a solar power company or an organic food manufacturer. However, it’s important to note that just because a company is engaged in a sustainable business, doesn’t necessarily mean they are exempt from other CSR considerations.
2. Negative Screening. With negative screening, the investor excludes certain companies that do not place a high value on CSR within their business practices. Often times, this approach means eliminating entire industries, like tobacco companies or defense contractors. Like positive screening, negative screening can be subjective, as each SRI investor has his or her own idea of what does or does not constitute an ethical company. For example, an investor who uses religious screening criteria may want to avoid a medical devices company that manufactures products used in abortion procedures. However, a pro-choice investor will likely not take issue with this company, and rather, may actually consider it as a candidate for a positive screen.
3. Best-in-Class. With best-in-class, the investor often targets a progressive company within an industry likely to have a poor CSR track record. An example would be an oil company that’s an industry leader in environmental conservation. While the type of business (oil drilling) may not be considered socially responsible, the way the company conducts their operations (making environmental protection a priority) is the chief criteria. In a way, this investor seeks to encourage and reward good corporate behavior with their investment dollars. It’s important to note, however, that this approach can be susceptible to greenwashing, as a company may market themselves as being an upstanding corporate citizen, but in reality, may not live up to that image. A prime example of this would be BP, which was once a top pick for best-in-class SRI investors prior to the Deep Horizon disaster.
4. Activist Investing. With activist investing, the investor targets those companies with poor CSR track records in the interest of changing the company’s business practices. This approach uses proxy votes and shareholder resolutions to pressure management to alter corporate behavior. This approach is most effective when used by large institutional investors (mutual funds, pension funds or foundations) or a coalition of smaller investors. The activist investor, while a bit unorthodox in their approach, can achieve significant long term CSR victories when successfully petitioning large corporations to change their business practices.
5. Community Investing. With community investing, the investor is less concerned about the financial returns of their investment then they are about the greater social impact. The main goal with this approach is to deploy investor capital to individuals, organizations or geographic areas that have historically been denied access to capital by traditional financial institutions. Often times, this style of investment is done by larger institutions. Individuals can also take part in this approach through microfinancing, for example.
In addition to considering the social and ethical approaches discussed above, it’s also important to make sure that an investment is a good fit for you, especially in terms of risk tolerance (how much risk you are comfortable taking – some investments can be riskier than others) and time horizon (when you will need access to your money – investors with short time horizons generally should stick to less risky investments).
As always, if you need help finding a socially responsible investment that’s a good fit for you, let us know and we’d be happy to schedule an introductory phone call.
Image Credit: Tom Magilery