What is SRI?
Investing can do good for more than just your wallet. Recent years have seen a surge in what is commonly called “socially responsible investing,” or investing for a cause.
Socially responsible investing is actually a subsector of a larger investing discipline called “sustainable and responsible investing” (SRI). SRI provides investors a way to receive both an economic and social return on their investments. Anyone can be an SRI investor—individuals, banks, hospitals, foundations, religious institutions, etc.
Sustainable and responsible investments avoid “sin stocks” and other companies with potentially harmful social or political beliefs, such as pornography distributors, casinos, tobacco companies, distilleries and weapons manufacturers. Besides excluding these types of companies, SRI also seeks out companies that are ethically and morally defensible, such as those that explore alternative energy sources, work to minimize their carbon footprints, promote good corporate governance, invest in low-income communities, address diversity issues in the workplace and promote innovation. SRI often goes by other names in popular culture, such as values-based investing, “green” investing, ethical investing or impact investing.
More than one out of every nine dollars currently under professional management in the United States is invested according to SRI strategies.
There are three main ways that investors achieve sustainable and responsible investing: ESG (environmental, social and corporate governance investing), shareholder advocacy and community involvement.
ESG – Investors seek out companies who fulfill environmental, social and corporate governance criteria. Usually, investors choose those companies that uphold the criteria most important to the investor, whether the environment, human rights, consumer protection or any other area. For example, an environmentally conscious investor would likely invest in companies researching wind or solar power.
Shareholder advocacy – Investors influence corporate decisions through dialogue, gaining media attention or filing resolutions for shareholder votes. For example, shareholders could file a resolution to vote down a decision to increase coal production within the company.
Community involvement – Investors seek out companies that direct attention toward underserved communities both in the United States and abroad. For example, investors choose a company that gives low-interest loan recipients in third-world countries access to increased health care.
Why Invest in SRI?
SRI growth is undeniable—over the last two years, it has grown by more than 22 percent and now represents $3.74 trillion of assets under management in the United States. In fact, more than one out of every nine dollars currently under professional management in the United States is invested according to SRI strategies. But why are investors choosing to do this, and why is it beneficial?
Beyond providing a moral boost to its investors, many people believe that because the companies that SRI focuses on demonstrate strong ESG performance, these companies are better positioned for long-term value. The logic is that these companies are run by management who are actively trying to minimize business risk and seek opportunities to outpace competitors, so these investments will eventually outperform non-SRI competitors.
While studies have shown that SRI is competitive with non-SRI in terms of performance, there is no way to know if they will indeed outperform the competition in the future. As with any investment, there are risks and there is no guarantee of success. The biggest consideration for SRI is whether you as an investor feel strongly about the company you are investing in.
Getting Involved in SRI
Before inclusion in an SRI fund, companies are usually screened using the following three methods:
Negative screening – For example, decisions the fund manager has made not to invest in companies that are involved in a particular “sin” sector.
Positive screening – For example, decisions the fund manager has made to seek out companies with involvement in alternative energy.
Restricted screening – If a small part of a corporation’s activities are in a questionable sector, but this amount is very small compared to the rest of the company’s holdings, SRI investment is still permitted. This is often unavoidable because most large corporations are highly diversified in their investments.
Traditionally, only negative screening was used to determine SRI worthiness. However, the more recent concept of a positive screening method helps investors include more diversification in their portfolios. Portfolios based solely on negative screening risk underperforming because they avoid investments in certain sectors.
Buying SRI mutual funds is the most common way to invest in SRI. Most traditional mutual fund companies will include SRI funds in their menu of choices. This allows investors to make a diversified investment in a company or cause that they believe in.
In recent years, alternative investments such as hedge funds, property funds and social venture capital have also become a growing option for getting involved with SRI. Due to the growth of SRI since the 2008 financial crisis, many of these fund managers are now willing to incorporate exclusionary screens into their investment approaches. The amount of SRI capital under the management of alternative investment funds grew by almost $100 billion from 2010 to 2012 and continues to be one of the most dynamic segments within SRI.
If you are considering sustainable and responsible investing or want more information about how to effectively invest in SRI, contact us for more information.
The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. Fingerlakes Wealth Management does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues.This article was written by Advicent Solutions, an entity unrelated to Fingerlakes Wealth Management. © 2013,2014 Advicent Solutions. All rights reserved.