Nowadays, it is almost impossible to be unaware of socially responsible investing, thanks to investors and companies updating their (personal) future goals.
Socially responsible Investors
So, how do you become a socially responsible investor? It is easier than you might think and can be more lucrative than traditional investing when done right.
Firstly, decide on the efforts you can commit to. When time allows, you will do your own fundamental analysis. If time is scarce, then you can follow industries considered ‘leading’ metrics, which are explained at the end of this page.
What Is Socially Responsible Investing?
When considering ESG & SRI, most people think of physical acts rather than the impact of their money. Neither is ‘better’ than the other and both have significant potential to make an impact. As a nice bonus, investors can net a competitive return thanks to the socially responsible investing mechanics.
Although not new, SRI had some traction back in the 90s. Since 2019, according to a Morgan Stanley survey, 85% of investors are at least interested in socially responsible investing.
Socially responsible investing is a way to invest in social change and returns to investors. SRI investments are usually made into companies that have been confirmed to make a positive sustainable and/or social impact.
The movement that goes by many names
The ‘new way of investing’ goes by many different names. ESG, Values-based investing, sustainable investing and ethical investing are just a few synonyms going around. ESG stands for environmental, social and governance by the way, and is another data-driven strategy.
As expected, to be socially responsible, a company must make decisions based on an ethical compass, rather than profits (alone). Although many believe profits and ethics conflict, this is often not the case. An overlap exists, but they do not need to be mutually exclusive at all.
How to decide on your SRI priorities?
If you have decided to do your own research, you should carefully consider if you have any social responsible ‘niche’ you wish to grow. As your investment will represent your financial and ethical support, your choice matters.
Going all in
One way of going about SRI is to pick a thematic investment you believe will overall improve the world. The advantage here is a transparent, consistent and relatively unchanged offering to choose from.
Consider being a supporter of green energy and therefore investing in wind energy companies. You have just established your full plan and options. However, consider that without diversification, financial investing carries increased risks should the chosen ‘niche’ collapse.
Balanced and informed
Ok, so what to do if you have relatively little time to commit, but want to avoid the above disadvantages of ‘niche’ picking? Then, you can follow below ESG & SRI indicators but should read up on them first.
This way, you have your guided hand, but know what each point, star or credit stands for. More important, you will know if these metrics align with your personal ethical spectrum. If they do not, it should be self-explanatory you should not use them for guidance.
Socially responsible investing Indicators
SRI indicators are in abundance and all carry a unique definition. Several of the bigger & more adopted metrics are discussed below flaws and all included. So that you can create your own verdict on what value they carry for you personally.
Financial product & instrument themes
One of the more overall and consistent ways of looking at RSI, ESG and so on, is to log into your brokerage account if you already have one. Why? Because brokers have started to classify their products/instruments offered, by this kind of themes as well.
Although you won’t always know exactly how these companies improve the world as a whole, you will be rather confident it’s a better alternative than a Rhodium mine in South Africa!
The Morningstar sustaiability rating
Morningstar is a reputable company in the financial world and has created its own rating to indicate how sustainable investment is. Globes are used from 1 (poor) to 5 (excellent) relative to a list of criteria that are considered sustainable. These criteria can be found online here. 24 pages in length, but worth the one read to see if to your liking!
The ESG MSCI rating
ESG MSCI rating is very transparent at first glance, is explained here and can even be applied directly per instrument here. When you click the link, you will notice Apple is inserted to give you a direct example.
The methodology has come under scrutiny for its inside out approach to impacting the earth. There is some fair criticism to consider. Yet, no ‘better’ alternative has been found.
Beware of ESG labels at face value
Due to the increase in popularity around ESG, socially responsible investing and so on have become impossible to ignore. Unfortunately, this has resulted in some organisations and individuals making misuse of the positive perception the stamp would provide.
For example, Bloomberg published this article explaining in greater detail how your own research remains essential, as companies like MSCI could still have hidden agendas.
Socially responsible investing is a way to invest in social change and returns to investors. SRI investments are usually made into companies that have been confirmed to make a positive sustainable and/or social impact.
You can analyze socially responsible investing in a multitude of ways. One way is by using morningstars’ sustainability rating or MSCIs ESG rating. Other options are explained on this page.