What is socially responsible investment?
Socially responsible investment (SRI) is one of a few names coined to describe a way of investing that brings about both financial gain and positive social change. It dates all the way back to the 1700s, when Quakers in Philadelphia banned members from using slave labour, and though it has changed over the years, the underlying principle has remained the same.
A ‘regular’ investor considers the financial impact of his or her investment; “Will this investment bring me financial returns in the long run?”
SRI brings in moral judgement as well; “Are the companies I invest in engaging in anti-competitive practices? Are they using unsustainable palm oil? Do they pay the Living Wage? Do they treat customers fairly?”
SRI? ESG? Impact investing? What’s the difference?
The term SRI is often used interchangeably with ESG (environmental, social and governance) or impact investing, and although similar, there are some distinct differences that separate them.
ESG are environmental, social and corporate governance factors that may impact how well a company we invest in will perform. For example, a company that has a record of poor animal welfare and tax avoidance is likely to perform worse financially than one which does not — they risk a poor reputation, they could get into trouble with government, they will struggle to hire great staff etc. The main objective of the investment is still financial gain, however, considering ESG factors can help to improve this.
SRI strategies tend to take this one step further, whereby investment decisions are actually made based on ESG factors. For example, an investor could decide not to invest in oil companies because they care about climate change.
For impact investors, ESG factors are even more important. So much so that impact investing companies, like Tumelo, work hard to measure the real positive change they are helping to create. Impact investing is driven by a belief that companies that operate for purpose and that solve pressing societal needs — such as clean energy, poverty alleviation, access to healthcare etc. — will perform best (“out-perform”) over the long term.
What counts as a socially responsible investment?
Let’s look at companies putting ESG into practice:
Environment
When it comes to the environment, investing in a socially responsible way tends to mean only investing in companies that have strong, pro-environmental policies. This could include initiatives to reduce carbon footprint, increase the recyclability of products or eliminate single-use plastics.
For example, you could invest in Nike, whose ‘reuse-a-shoe’ programme sees old sports shoes collected in stores and turns them into a material used to create playground surfaces. Or, if Blue Planet II has brought plastic to your attention, consider Starbucks, the food & drinks giant aiming to eradicate their use of plastic straws by 2020. To help with this they have even created a straw-less lid for their cups.
Social
When we talk about the social aspect of SRI, we consider whether a company and its product/service is good for the community, be it on a local or global scale. This might mean avoiding tobacco and alcohol producers, fast-food companies and instead choosing to invest in companies that promote human rights and ethnic diversity.
Fashion giant H&M are a great example of a company striving for first-rate human rights across its own supply chain. One way they have done this is by pushing for employees along their supply chain, around the world, to be paid electronically rather than with cash. This is much more transparent than handing over a wad of cash and helps to improve workers’ access to financial services like mobile banking.
Governance
Governance is the way that a company operates internally, and to be socially responsible companies need to adhere to certain principles. These include transparent financial reporting, fair employee wages and paying the correct amount of tax.
Diageo, the global drinks conglomerate is a good example of this. The company consistently ranks in the top 10 in the UK on corporate governance factors. This includes having a diverse board (achieving gender equality for the first time ever in 2018!), a strong whistleblowing policy and high levels of external accountability.
So, why become a socially responsible investor?
For most investors, money is on the mind. As a socially responsible investor, you’ll get this and more. At Tumelo, impact investing is our bread and butter — we help you invest your money with companies that you know are changing our world for the better. Through our mobile app, you build a personalised portfolio of companies like Tesla, Nike & Vestas Wind, invest from a pound, and join a digital community of impact investors — connecting with each other & combining your voices to influence positive change at the companies you own.
This article does not constitute investment advice and individual investors should make their own decisions or seek independent advice. As with all investing, the value of investments can go up as well as down and you may receive back less than your original investment.
