Introduction to Socially Responsible Investing
Socially responsible investing has been around for decades, but it wasn’t until the early 2000s that it became mainstream. This type of investing allows individuals to align their personal values with their investment portfolios. The concept of ESG (environmental, social, and governance) has become a key factor in making investment decisions.
History of Socially Responsible Investing
The origins of socially responsible investing date back to the 18th- and 19th-century sugar boycotts by abolitionists. The practice gained popularity in the 1960s and 1970s, when faith-based groups used religious beliefs and ethical codes to define investment parameters. In 2006, the United Nations formally codified ESG, which has since become a widely accepted standard for evaluating investments.
Understanding ESG Investing
ESG investing takes a "best-in-class" approach, comparing a company’s scores on environmental, social, and governance pillars to its industry peers. Third-party scorers examine criteria that are financially material to a company’s operations. Examples of ESG factors include:
- Environmental factors: carbon emissions, energy efficiency, mitigating pollution
- Social factors: strong worker protections and diversity policies, product safety, protecting consumer privacy
- Governance factors: board composition, board independence, executive compensation
Socially Responsible Investing vs. Sustainable Investing
Socially responsible investing, also known as SRI, uses exclusionary screens to exclude companies in certain industries, regardless of their ESG scores. Sustainable investing, on the other hand, seeks to invest in companies that make a positive societal impact. Sustainable investing may support companies that offer community-development loans, serve unbanked populations, or bring digital services to underserved communities.
Finding ESG and Sustainable Investments
When searching for ESG and sustainable investments, it’s essential to do your due diligence. No company is perfect when it comes to sustainability, so it’s crucial to know what matters to you. ESG scores are useful when reviewed over time to see how a company’s score rises or falls. The Sustainability Accounting Standards Board (SASB) Materiality Finder is a good place to start your research, allowing you to look at disclosure topics and their associated accounting metrics for 11 different industries.
Researching an ESG Fund’s Holdings
When researching an ESG fund, don’t just rely on its name. Dig into the prospectus and fact sheet to see which sustainable companies it holds. This is easier with ETFs, since most report their holdings daily. Researching the fund may tell you:
- If it’s a clean-energy fund, does it hold renewable energy producers, or are fossil-fuel companies lurking inside?
- How does it define its mandate? Does a water fund hold mostly water industry stocks, or does it include companies with indirect ties to water usage?
- Does it exclude entire stock market sectors, like energy or industrials?
Avoiding Greenwashing
Be diligent about so-called "greenwashing," when a company spends more on marketing to promote its green initiatives than on actual reforestation or species preservation. This can be a red flag, indicating that the company is more focused on its image than actual sustainability.
Conclusion
ESG and sustainable investing is a way to align your personal values with your investments, but it requires work to ensure your investments actually reflect those beliefs. Remember, these are investments first and foremost, so review a fund’s performance and fees, and make sure the risks match up with your time horizon, objectives, and risk tolerance. By doing your research and understanding the different types of socially responsible investing, you can make informed decisions that align with your values and support a more sustainable future.
