Good Honest Dollar $$

This is the first article in a series on Socially Responsible Investing (SRI).

Before we commence the series, I feel it’s important to step back and take a closer look at the nature of SRI and the type of activities it can involve.

 
What is Socially Responsible Investing?

Socially Responsible Investing (SRI), otherwise known as ethical investing, refers to the practice of taking social, environmental and ethical factors into account when making investment decisions.

Typically, those investors who endeavor to be socially responsible seek to invest their funds in a way that will have a positive impact on society as well as earning a competitive rate of return within an acceptable level of risk.

 
Common approaches to Socially Responsible Investing

In order to gain a broader grasp of the concept of SRI, I think it’s important to look at the range of different forms which Socially Responsible Investing can take.

Calvert.com provides a good summary of the different forms of SRI. Broadly speaking, there are six different forms (although Calvert lists only four):

 
• Investment screening.

This involves a process whereby potential investments in a portfolio are subject to a screening process to determine their suitability for inclusion in the portfolio from an ethical standpoint.

Some investors apply negative screens, under which investment in certain assets or companies is specifically excluded on ethical grounds. Other investors apply positive screens, under which they specifically seek out investments in certain sectors or firms which demonstrate specific forms of positive ethical behavior.

 
• Divestment.

As the name implies, this refers to the practice of divestment of shares or other assets based on ethical grounds.

This can be thought of as ‘selling in disgust’ or selling as a form of protest, and is often done in response to particular actions of the company.

 
• Shareholder advocacy.

Shareholder advocacy refers to the practice of shareholders using their position as owners of the company in an effort to influence corporate behavior and apply pressure upon their company to act in a socially responsible manner.

This can take many forms, and can include simple actions such as letters or phone calls, or more substantial actions such as resolutions at shareholder meetings, which are designed to mandate that the company act in a certain manner in relation to a particular issue.

 
• Community Investing.

Community investing involves channeling funds toward community projects, typically directed toward communities whose credit needs are not met by the traditional credit system.

Typically channeled through a Community Investment Institution, these investments provide funding for essential community services or infrastructure, as well as seed capital for promising local enterprises.

 
• Social Venture Capital.

Social venture capitalists provide early-stage funding in enterprises which are pursuing profitable ways to meet social needs.

Traditional venture capitalists provide early stage or seed funding to new or start up companies, often enterprises which are developing a form of new technology or business methodology. This funding provides the necessary capital for the enterprises to develop ideas into successful businesses or enterprises.

Social venture capitalism operates on a similar concept, but differs in two ways. First, social venture capitalists seek positive social outcomes from their investments, usually in addition to a competitive financial return. Second, social venture capitalists typically restrict their investments to fields which have a particular benefit to society, such as renewable energy, waste management, education or health and well-being.

Social venture capital involves a high level of risk, and should only be considered by investors with considerable financial resources as well as experience in project risk management.

 
• Social Entrepreneurialism.

This involves using traditional entrepreneurial skills to organize and manage business-like ventures to achieve a desired social outcome.

This differs from social venture capitalism. Social venture capitalists provide financial resources for the projects which aim to produce desirable social outcomes. Social entrepreneurs, on the other hand, initiate, organize and manage such projects.

The social entrepreneur may invest his or her own financial resources. But often financial resources are provided by external parties, such as lenders or social venture capitalists. More often than not, the principal ‘investment’ made by social entrepreneurs is the personal effort required to manage their venture to achieve the desired outcomes.

Conclusion

As we can see, SRI can take a wide variety of forms, and there are a range of options available for those wishing to invest their money in a socially responsible fashion.