What are Environmental, Social and Governance (ESG) and Socially Responsible Investing (SRI)?

Socially Responsible Investing (SRI) and Environmental, Social and Governance (ESG) are two huge growth areas in the early 21st century for financial markets investing.  For that reason, if you are interested in investing, you should be aware of what is going on in this field. Even if you are not particularly interested in these topics (although let’s be honest, most of us are aware of and concerned about these global issues). In this article we are going to look at what both SRI and ESG are, the different strategies for Socially Responsible Investing and some examples of SRI and ESG. If you want to discover some of the Socially Responsible Investing trends going into 2022, check out our dynamic page here What are the Socially Responsible Investing (SRI) trends into 2022?

What is Socially Responsible Investing (SRI)?

Integrating personal values and societal concerns with investment decisions is called Socially Responsible Investing (SRI). SRI considers both the investor’s financial needs and an investment’s impact on society. With SRI, you can put your money to work to build a better tomorrow while earning competitive returns today. Social investors include individuals and institutions such as corporations, universities, hospitals, foundations, insurance companies, pension funds, non-profit organizations, churches and synagogues. Moreover, SRI is more attainable and profitable than ever.

SRI is an investing strategy that targets the generation of both social change and solid, financial returns for the investor. Socially Responsible investments might include companies that are trying to make a positive sustainable or social impact and would exclude corporations that are making a negative impact. SRI is also described as sustainable investing, values-based investing, and ethical investing. The framework by which many Socially Responsible investments are made takes into consideration Environmental, Social and Governance factors, and this framework is often referred to as ESG or ESG investing.

Historically most investors usually have financial objectives for their investments. Obviously, different investors have differing objective (capital gains versus income) and have differing risk tolerance, but most traditional models and strategies for investing have a financial objective at their core. The big difference with Socially Responsible investments is that the Socially Responsible investor will not only have these financial goals but will also look to combine these goals with investing in companies or projects that reflect their personal values. And give that we all have differing values, the definition of Socially Responsible Investing will differ for each individual.

Socially Responsible Investing (SRI) Strategies

Three key SRI strategies have evolved over the years: Screening, Shareholder Advocacy, Community Investment and Social Venture Capital. This guide contains information on each of these strategies and practical ways for all types of investors to get involved.

  • Screening
  • Shareholder Advocacy
  • Community Investment

Screening

Screening describes the inclusion or exclusion of corporate securities in investment portfolios based on social or environmental criteria. Socially concerned investors generally seek to own profitable companies with respectable employee relations, strong records of community involvement, excellent environmental impact policies and practices, respect for human rights around the world, and safe and useful products. Conversely, they often avoid investments in those firms that fall short in these areas.

Shareholder Advocacy

Shareholder advocacy includes a wide range of strategies, whereby the Socially Responsible investors can engage with companies in their investment portfolios about environmental, social, and corporate governance issues. Such investors, dynamically engage with companies on with the aim of raising standards. These Socially Responsible investors often operate alone, focusing on the companies they have large holdings in. They may, however, also collaborate on major issues, where there are substantial challenges. An example of a collaborative engagement is the Institutional Investors Group on Climate Change (IIGCC).

Community Investment

Community investing is often view as a subcategory of Socially Responsible Investing. Community investing encourages direct investment into organizations that are community-based, with community investing institutions putting the investor’s capital to work by guaranteeing loans to organizations or individuals that have been unable access to capital from traditional financial market institutions. Or they may directly facilitate these loans. Such loans could be used for a variety of projects, including small business creation, corporate or individual education or personal development or for the provision of housing. The institution that provides the community investing often offers support, expertise and training, in order to try to ensure the loan is repaid and provides investor returns.

What are some examples of Socially Responsible Investing (SRI)?

We have already mentioned some examples of Socially Responsible Investing, the community investing as above and also the shareholder advocacy as with the Institutional Investors Group on Climate Change. Rather than doing a large amount of research into what individual companies are doing with respect to being socially responsible, many Socially Responsible Investors prefer to simply invest in funds that have a commitment to Socially Responsible Investing. For example, eToro offer exposure to these types of investments.

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You can learn more in our article about current SRI trends.

What is Environmental, Social and Governance (ESG)?

A strategy that Socially Responsible Investors can employ is to use the Environmental, Social and Governance (ESG) framework for investing. The aim is to profit and put your money to work with corporates that are looking to make the world a better place. ESG investing relies on independent ratings that assist the Socially Responsible Investors to evaluate a company’s conduct and policies regarding environmental impact, social performance and issues around governance.

This breaks down into:

  • Environmental – quite simply, what impact does the corporate have on the environment. This includes factors such as the company’s efforts to be sustainable in the supply chain and the carbon footprint of the company.
  • Social – is the company trying to improve its social impact. This could be regarding diversity with respect to race or gender, or sexuality in its staffing at all levels. Or the broader impact of the company on society.
  • Governance – does the board and senior management of the company look to encourage positive changes with respect to the above?

How Are ESG Scores Calculated?

There are ESG research firms that have a defined framework to calculate ESG scores for multiple companies. S&P Dow Jones Indices, MSCI and Bloomberg are just some of the large research firms producing ESG research and scores. Generally speaking, scores are based on a 100-point scale, with a higher score indicating that the company performs well under the ESG criteria and framework.

How Can You Find SRI and ESG Funds?

There are many ways to research about ways to invest socially using the ESG framework, which might be to do the research yourself, to look at a robo-advisors, or via a personal financial advisor. However, a very simple way to start on the road to Socially Responsible Investing is to choose an ESG fund. By investing in an ESG fund, this avoids the stress of choosing individual companies, allowing the fund manager to choose for you. It is easy to research for ETFs and mutual funds that follow the framework online.

There are a number of significant trends in Socially Responsible Investing, but climate change remains at the forefront. Other trends to watch out for into the 2020s are mental health, diversity of food options and a revolution in the fashion industry.

You can read more about the current trends at our page on SRI trends.