Socially Responsible Investing Joins the Mainstream
It’s not surprising that some people have a strong desire to steer their money toward entities that endeavor to make a difference in the world.
Growing investor interest — and wider recognition that social and environmental issues can amount to material financial risks and/or rewards for corporations — has landed socially responsible investments (SRIs) in the spotlight in recent years.
In a 2010 survey, 93% of CEOs said that sustainability will be important to the future success of their businesses, and 96% believed it should be integrated into their companies’ strategies and operations.1
“Socially responsible,” “sustainable,” and “green” all refer to an investing approach that integrates environmental, social, and governance (ESG) factors with more traditional financial analysis methods.
If you’re thinking about adding SRIs to your portfolio, keep in mind that you may be depending on your portfolio to help fund many of your future financial needs. For this reason, it’s a good idea to learn more about SRI opportunities and whether they might be appropriate, considering your asset allocation, risk tolerance, and time horizon.
How They Work
Many SRIs are broad-based and diversified. Others may focus on a narrow theme (such as clean energy); the latter types can be more volatile and may carry risks that may not be suitable for all investors.
Most SRI options utilize one or more of the following methods.
Screening involves selecting or avoiding investments in companies based on whether they help protect or cause harm to the environment or society. Some common ESG factors include, but are not limited to, pollution control, natural resource conservation, energy efficiency, employee relations, respect for human rights, health and safety, regulatory compliance, and public disclosure.- Shareholder activism describes efforts to influence a company’s management to adopt policies that help benefit the workers, the community, and/or the planet.
- Community investing provides capital directly to organizations for purposes such as lending funds to business enterprises in underserved communities and supporting economic development.
Considering Corporate Citizenship
Many companies have begun collecting and reporting ESG information, and services that provide research and data for investment analysis have also made this type of data available to the public. More transparency regarding corporate sustainability issues may give investors insight into potential costs, as well as the ability to compare how businesses in the same industry have adapted their strategies and practices to meet social and environmental challenges.2
Read the Fine Print
Socially responsible investments entail risk, could lose money, and may underperform similar investments not constrained by social policies. There is no guarantee that a SRI will achieve its investment objectives. As with many investment strategies, SRIs may limit the total universe of available investments, and investors who want to diversify their portfolios among a variety of sub-asset classes may not find a SRI to fill each sub-asset class.
Different companies offering SRIs may use different definitions of socially responsible investing, and investors may have different opinions about which policies and practices they believe are positive or negative. However, the universe of SRI opportunities continues to expand, so there may be investments that align with your personal values and investment goals and objectives.
1) Businessweek, November 9, 2010
2) Fast Company, April 1, 2011
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.
