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Socially Responsible Investing (SRI): All you Need to Know

What are socially responsible investments, and why have they grown in popularity during the global cause for concern regarding climate change? Can socially responsible investments encourage companies to go green?
Green News
2023-08-01T00:00:00.000Z
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In an era where global warming is impacting every region, company, and person on the planet – it’s inevitable that climate change would impact finances, as well.

Socially Responsible Investing, otherwise known as SRI – is an innovative, careful method of investing that is attracting individuals, businesses, and global leaders alike for its sustainable social and environmental values.

But why should an individual investor or company choose socially responsible investing over other types of investments?

What is Socially Responsible Investing? 

Socially responsible investing, otherwise known as SRI – is a type of social investment that pertains to social responsibility as the companies or individuals that choose socially responsible investing usually have other goals besides finances in mind.

The acronym for socially responsible investing, SRI – stands for, “sustainable, responsible and impact” investing, which illustrates the core values that socially responsible investing strives to encourage investors to accomplish. 

A main goal for those who choose to commit to socially responsible investments is to be socially cognizant of your investments and how they can impact society, rather than prioritizing yourself or the company’s future financial return.

Socially responsible investments are done by individuals or companies that seek social justice and equality in their investments. SRI strives to implement the principles of positive social effects on society in one’s investment patterns, and it has been growing in popularity ever since climate change has grown as a global cause for concern. 

While SRI’s are aimed to help society, investors should remain aware that socially responsible investments are ultimately, still a financial activity – and should remember to weigh the pros and cons of the potential investment for their future financial returns. 

How does Socially Responsible Investing work?

Socially responsible investments work by weeding out the companies that manufacture, market, or condone selling harmful substances or activities such as alcohol, gambling, and smoking cigarettes. Through this sifting process, companies interested in making an investment can determine which businesses, projects, and organizations are committed to social equality and sustaining the environment. 

For example, a company that seeks to use renewable energy sources can be deemed as a worthy socially responsible investment – but a company that harvests fossil fuels and oil, which produce greenhouse gasses that pollute the atmosphere, may not be deemed as a socially responsible investment. 

As socially responsible investing has been growing in popularity, threatening the existence of traditional investments, there are many new funding opportunities available for retail investors. For instance, mutual funds and exchange traded funds, otherwise known as ETFs – allow investors to have exposure to multiple companies at once with a single investment. Therefore, this allows the investor to be a stakeholder in multiple projects or companies at once whilst also helping multiple social causes. 

Socially responsible investments are usually made through mutual funds or exchange traded funds. 

What are the two main goals of socially responsible investing?

The two main goals of socially responsible investing are to have a positive social impact and to create a lucrative financial return. However, it isn’t compulsory that a socially responsible investment provides the investor with a good financial return – as the financial aspect is not the primary mission of socially responsible investing in the first place. It is ultimately the investor’s decision to partake in the socially responsible investment, realizing that it may slightly deter their financial success in exchange for benefiting the environment or society. 

There are many ways to commit to socially responsible investing. For example, community investing is a method of investing where the community’s potential societal impact is prioritised over the fiscal monetary return on the investors end. In short, any type of investment that seeks to place social importance over potentially, financially lucrative goals – can be considered a socially responsible investment. 

What are the pros and cons of Socially Responsible Investing? 

The pros of socially responsible investing are clear, as with SRIs – an investor can feel good knowing that their investment is being made to a company or project that is clearly committed to achieving their environmental and socially sustainable goals. Socially responsible investments benefit society and the environment, and strive to mitigate any further social and environmental harm. 

However, that doesn’t mean that there aren’t downsides or difficulties to socially responsible investing. 

Socially responsible investments work by pertaining to the current social and political climate at the time the investment is made. Therefore, it is crucial that investors understand the risk of socially responsible investments. Since SRIs prioritise social improvement over financial gain, the investor could prevent themselves from achieving their financial goals if the social value they invested in at the time loses potency in the present day. 

This can be considered a con of socially responsible investing, as it is often necessary to recruit the help of a third party to properly delineate what can qualify as a socially responsible investment. Professionals seek to clarify this through a company’s environmental, social, and governance factors – otherwise known their ESG data. An ESG score is one of the surefire ways that an investor can confirm if a company or project is serious about sustainability and improving society. (ESG) factors for investing. Unlike impact investments, this is an extra step that requires extra time and effort that other investments do not – which could turn investors off to the idea of socially responsible investing since alternatives like impact investing are not as difficult to do alone.

Ultimately, an investor must be dedicated to the non-financial aspects of socially responsible investments.

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Do SRIs result in a lucrative financial return? 

Many investors could be wary of socially responsible investments, as they are known to prioritise social just over lucrative fiscal return. However, socially responsible investments do not automatically mean that the financial return won’t be as good as one from a typical investment would be.

In fact, socially responsible investments can produce just as satisfactory financial returns as a standard investment can. According to Arabesque Partners in 2020, research showed that the majority of sustainable efforts, including socially responsible investments, can provoke lucrative financial performance as well. 

This can be due to the fact that as customers, employees, and investors around the world grow aware of the impacts of climate change – that more money is being invested into companies and projects that seek to aid in the fight against global warming and to protect the citizens of the world against inequality. In short, the more popular sustainability grows as a whole, the more successful socially responsible investments could prove financially valuable. Since sustainability practices seek balance, socially responsible investments also have the tendency to be less volatile than traditional funds. Therefore, they may not make as much money as quickly – but they also won’t be subject to drastic changes the way that traditional funds can be. 

As more companies strive for sustainability, it’s clear that socially responsible investments have the potential to not only do good for the world – but for your wallet, too. 

What is the difference between impact investing and socially responsible investing? 

Socially responsible investing refers to a method of investing where a company or individual chooses or doesn’t choose a potential investment opportunity according to the project’s motivation, or lack of incentive, to improve the stance of the environment. These can be confirmed through environmental accreditations such as an ESG score or a company obtaining an ISO 14001. 

The main goal of impact investing, on the other hand – is for a business or organization to benefit society and environmental causes while simultaneously creating a financial return to fiscally improve the company. 

Both impact investing and socially responsible investing aim to positively contribute to society and environmental causes, but the process for choosing a company or project to invest in that aligns with the values of socially responsible investing is stricter than the criteria for impact investing. 

For example, an investment can be considered an impact investment as long as it does some sort of beneficial act for society or the environment, even if the company the investor chooses to invest in isn’t completely sustainable or aims to reduce their carbon footprint 100% of the time. Socially responsible investments, on the other hand – often require that the company the investors chooses to not purposefully engage in any activities or substances that could be harmful to the environment or society. 

Both socially responsible investing and impact investing are selective and aim to create a particular portfolio that doesn’t strive solely for economic growth, but with the mindset to yield beneficial improvements across other sectors – such as social issues and environmental difficulties, like global warming. 

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Can Socially Responsible Investing help mitigate climate change? 

The act of socially responsible investing alone does not mitigate climate change directly. However, encouraging other investors to participate in socially responsible investing can encourage more companies to establish environmentally friendly goals that will reduce emissions and can aid in the fight against global warming. 

Basically, if more and more investors become adamant about socially responsible investing, companies will have no choice but to alter their business model to be more environmentally friendly in order to meet the credentials required of socially responsible investing. If more companies change their industrial habits to reduce emissions because they are more likely to receive funding if they do, then in a way – social responsible investing will help to mitigate climate change. 

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Is Socially Responsible Investing good for the future of your business? 

Socially responsible investing is extremely beneficial for any business 

SRI’s not only help an ulterior social or environmental cause, but it is helping various social and environmental projects while also financially aiding your own business. Socially responsible investing can also serve as an incentive for your company to obtain well-known environmental credentials – like ESG score or an ISO 14001. 

It’s easy to get started with socially responsible investing. It begins with deciding which environmental and social causes are most important to you. After that, you can consider how much effort you’d like to put into the investment – choosing to use ETFs or seeking third party assistance that can help you create the perfect portfolio for your socially responsible investment. 

Ultimately, socially responsible investing is long-term investment for a better future for everyone involved. Future investors, customers, and employees are more likely to contribute to a business or project that seeks to qualify as a socially responsible investment – and as climate change continues to infiltrate our daily lives, sustainable finance is more important than ever before.

What about Greenly? 

If reading this article about socially responsible investing, otherwise known as SRI – has made you interested in reducing your carbon emission to further fight against climate change – Greenly can help you!

Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.

Click here to learn more about Greenly and how we can help you reduce your carbon footprint. 

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