Socially Responsible Investing (SRI), also known as sustainable, socially conscious, “green,” or ethical investing, is an investment strategy that often uses positive or negative screening to decided whether to include or exclude investments from a portfolio. The strategy considers both financial return and social/environmental good to bring about a positive change. Investors no longer need to sacrifice financial returns to create social good.
To measure the sustainability and the ethical impact of an investment, three main factors are often considered: Environmentally, Socially, and through Governance. These three criteria are often referred to as ESG.
Another investing strategy is called Impact Investing. Impact Investing is a form of Socially Responsible Investing, but focuses more on the improvements within a specific area. For example, a Socially Responsible Investment would be investing in a corporation that has excellent waste management and recyclable product packaging. An Impact Investment would be investing in local businesses or buying city bonds to improve the local schools’ infrastructure.
Why should we care about Socially Responsible Investing or Impact Investing?
Socially responsible investors encourage corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity. Some avoid businesses involved in alcohol, tobacco, fast food, gambling, pornography, weapons, or fossil fuel production. By exerting our collective investment power, or our power as consumers, we can bring about positive changes to the environment and to our local communities—achieving social benefits desired along with the financial rewards.
ESG engagement can create value for both shareholders and companies. Please see a report commissioned by the Principles for Responsible Investment (PRI.org) here.