What is responsible investing?

Socially Responsible Investing

People are increasingly looking for ways in which they can have a positive impact on the world. Over the past decade we have seen a dramatic increase in the number of people switching to plant based diets and choosing to drive electric or hybrid vehicles. These lifestyle changes are both widely understood and accepted ways to lessen our impact on the environment, but another way to have a positive social impact is through the growing world of socially responsible investing.
 
Here we explain what socially responsible investing (SRI) is and why investing to improve the world is on the increase. 

What is socially responsible investing?

Socially responsible investing is an investment approach that targets companies making a positive impact on society and those that are committed to not doing harm. The first group of businesses might include those looking at address some of the United Nation’s sustainability goals, such as reducing hunger, access to education, access to good health and wellbeing, or providing affordable and clean energy. The second group might include businesses whose activities may not be obviously positive, but who operate in a way that balances out the harm they might otherwise cause. Either way, the aim of socially responsible investing is to invest in those organisations who have an increased focus on the positive impact they can having, or could have, on society. 
 
As part of the selection criteria for what qualifies as a socially responsible investment, a company’s environmental, social, and corporate governance (ESG) performance will be assessed to determine if it is being run in a socially responsible way, and measure the positive or, at the very least, a neutral impact it is having on society. 
 
From an environmental perspective, this may include how the company’s operations impact the environment, how it manages resources, how it deals with waste and its carbon footprint. Its social performance may include its approach to employees, gender and diversity, the use of ethical supply chains, how it treats customers and suppliers, and its relationship with local communities. With regards to governance, there may be scrutiny of how a company is run, the policies it has and how they are implemented, the pay structure, diversity and effectiveness of directors and senior executives, and the company’s approach to transparency and business ethics. 
 
However, even if a company performs well from an ESG perspective, some businesses and sectors still won’t qualify as socially responsible investments as their end products or service are seen to have a negative impact on society. This may include companies that produce tobacco products, manufacture weapons, and those involved in gambling. Also, investment experts will filter out those businesses whose operations or approach do not live up to the socially responsible claims they make. 
 
Fundamentally, socially responsible investing involves investing in those businesses which operate in a socially responsible way and are either already financially successful or have good potential to help an investment grow.

Why is socially responsible investing increasing in popularity?

As we have explained, people are increasingly looking for ways to have a positive impact on the world. By investing in businesses working hard to make a difference and operating in a socially responsible way, investors can feel they are supporting the growth and development of socially responsible, progressive businesses, whilst hopefully seeing their investment grow. 
 
Central to this is the growth in large investment companies and pension funds which specifically target companies operating in a socially responsible way, whilst avoiding those that do not. These “green” or “ESG” investment funds and products are run by investment experts who examine both the financial and ESG performance of a business and assess their current performance and future potential. Amongst investment professionals there is a growing view that socially responsible businesses operate more transparently, have forward thinking and progressive approaches to business and, through the additional ESG reporting they undertake, provide greater visibility of potential risks and opportunities than their less socially responsible peers. In the wake of the Covid-19 pandemic, many investment professionals also hold the view that socially responsible businesses may be more resilient and future-proof because they are looking at their operations in the context of environmental, social and governance pressures and risks, and are therefore more aware of the market in which they operate.

So how can I be a Socially Responsible Investor?

Pension funds and investment companies are increasingly offering socially responsible investment products and services for those who care about how their money is invested. Some investment businesses and banks also market themselves as being “ethical” or “socially responsible” in the way that they do business and the types of organisations they will deal with.

As a result, it is now possible to choose investment and pension products, plans and approaches which have an increased, and even exclusive, SRI, ESG, or “green” focus so that your money can be invested either directly or via a fund in socially responsible businesses.
 
As with all investment decisions, it is important that you understand the risks involved in socially responsible investing, so we do recommend you speak to an independent financial adviser for help and advice. However, with increasing legislation by governments to address issues such as climate change and renewable energy generation, plus increasing consumer awareness and focus on how businesses operate, it is quite possible that socially responsible investing could one day become the norm.