This post provides an overview of socially responsible investing and touches on some of the background and issues surrounding it. Socially responsible investing (SRI) is a method of investment in which the investor invests capital only into companies that engage in socially responsible behaviors. This post is targeted towards those who may not already have had previous exposure to the SRI movement and the issues facing it.
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An ethical dilemma is rising to the surface on Wall Street. The dilemma is this—what is the primary mission of a corporation? The 1980’s defined an era as Corporate America and Wall Street came to be primarily identified as greedy self-interested entities that were concerned with one thing—shareholder value. The primary mission of corporations across America was to increase shareholder value by as much as possible because, of course, the primary shareholders of the company were generally the executives at the top of the ladder. This identification led corporations to do everything in their power to increase shareholder value, even at the expense of ethical and moral issues.
Much of this trend has begun to shift over the last 10-15 years, however. During the late 90’s and 2000’s, corporate governance became a central focus of many investors, analysts, politicians, and lawmakers. All of a sudden, the long-held belief that only shareholder value mattered, was brought into question. Is that all that really matters? Or is there a greater purpose? Does the manner in which a company increases shareholder value matter? Thus, was born the corporate governance and socially responsible investing movements.
Socially responsible investing (SRI) is a method of investment in which the investor invests capital only into companies that engage in socially responsible behaviors. For example, companies that sell guns, alcohol, tobacco, and other potentially dangerous goods or services are blacklisted. Now, to be clear, SRI did not begin in just the last few years. Religious leaders have promoted SRI for centuries, most notably the founder of the Methodist movement, John Wesley. However, SRI has gained widespread acceptance in the last 2 decades as the general population gains a strong social consciousness concerning subjects such as the environment and social justice.
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Return Versus Responsibility
One of the great debates surrounding SRI is return versus responsibility? In years past, many investment managers were hesitant to engage in SRI largely due to fears that it skipping out on investing in non-socially responsible firms could lead to lower returns, which was the primary mission of most investment managers. However, this bias has shifted dramatically over the last few years. SRI is an exploding market in the developed world, and analysts estimate that nearly $3 trillion is parked in SRI-screened funds.
Screeing versus Activist Investing
Screening is an SRI strategy, in which the investor invests capital in companies that pass a screening process. Therefore, these investors are investing in companies that abide by socially responsible behaviors. Activist investing is considered an SRI strategy as well, but it varies significantly. In activist investing, an investor invests in a company that fails the screening process. The sole intent of the investor is to take a large enough position in the company so that he or she may influence corporate governance and behaviors in a way to help the company “clean itself up.” Thus, an activist investor not only wins by helping change a company, but they also hope to see capital gains through appreciation of stock value.
SRI and Pension Funds
As an individual investor, engaging in SRI is not nearly as difficult as trying to daytrade the USD CAD in the fx market. Most, if not all, large brokerage houses offer mutual funds and other investment vehicles that are tagged as SRI-screened funds. An SRI-screened fund simply means that all the companies that receive investment capital from the fund have been screened and found to be socially-responsible companies.
However, until the last few years, pension funds were a bit more difficult. Generally, pension funds offer the investor very few choices. But due to rapidly increasing demand, most pension funds offer investors an SRI option. In order to shift your capital into a pension fund that is tagged as SRI, simply contact your investment advisor representative and ask about SRI options in your pension fund.
Community Investments
This is one final type of Socially Responsible Investing that has garnered more attention in recent years. This involves a group of investors investing capital into projects and companies in a targeted community. Ideally, the receiving company is seen as a benefit to the company and the product or service they provide typically helps build the community.
