Is it possible to make the world a better place while also saving for your financial future? The answer is yes, thanks to an investment discipline known as Socially Responsible Investing (SRI).
Investors who adopt an SRI approach to investing seek to achieve competitive financial returns while also avoiding companies that conflict with their personal values. The term SRI is sometimes used interchangeably with “sustainable investing” and “impact investing.” No matter which term is used, the general idea is to consider how a company impacts the world and whether those impacts align with your personal ideals.
the general idea is to consider how a company impacts the world and whether those impacts align with your personal ideals.
Understanding Environmental, Social and Governance (ESG) factors
Socially Responsible Investing incorporates environmental, social, and governance (ESG) factors to screen out certain companies while also seeking out companies that meet specific criteria.
By investing in socially responsible investments , you can, essentially, put your money where your mouth is. It’s not just about avoiding certain practices, it’s also about seeking out companies that are taking active steps to improve their operations in ways that benefit society and a company’s bottom line. SRI investments typically incorporate the following ESG criteria into their investment selection process:
- Environmental factors, such as carbon emissions, air/water pollution, energy efficiency, product packaging, waste management, and the sourcing of raw materials. For example, if you’re concerned about climate change, you could choose investments that avoid coal miners or other companies that emit large volumes of greenhouse gases.
- Social factors, such as a company’s treatment of its employees, suppliers, and customers. This includes a company’s practices related to human health, human rights, fair labor standards, gender diversity, and data protection/privacy, among other issues. If you’re concerned about social factors, you might choose to avoid companies that don’t support labor unions or worker safety protections.
- Governance factors, such as executive compensation, shareholder rights, the diversity of the board of directors, lobbying activities, and business ethics. If you’re concerned about ensuring women are paid at the same level as men, you might choose to avoid companies that fall short in this area or don’t have women on their boards of directors.
Keep in mind that the ESG factors described above have been shown to enhance a company’s bottom line. So you do not have to sacrifice solid returns for moral clarity. As an example, a survey of 21,980 firms from 91 countries found that having a woman in the executive suite increases a company’s net margins by one percentage point.1 Increased gender diversity in the board room also helps boards avoid “groupthink.”
If the concept of SRI appeals to you, you can adopt an SRI strategy in three ways. You can seek out investments that include companies based on ESG factors, seek out investments that exclude companies based on ESG factors, or employ a blended approach that aligns with your personal values.
To get started, consider asking your financial advisor to review your current portfolio for ESG factors. You can then take steps to align your money with your personal values.
- Companies with more female executives make more money—here’s why. https://www.cnbc.com/2018/03/02/why-companies-with-female-managers-make-more-money.html
