Introduction
Socially responsible investing (SRI) is a type of investing that takes into account environmental, social, and corporate governance (ESG) criteria. SRI allows investors to align their investments with their values while also potentially producing competitive financial returns. According to the Forum for Sustainable and Responsible Investment, “SRI is an investment discipline that considers environmental, social, and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.”
The motivations behind socially responsible investing vary from investor to investor, but typically include wanting to have a positive impact on society and the environment, avoiding companies that are involved in activities or industries that one does not agree with, and wanting to invest in companies that are committed to sustainability.
Examples of Successful Socially Responsible Investments
There are numerous examples of successful socially responsible investments, such as the Clean Energy ETF (PBW). PBW invests in clean energy companies such as solar and wind power companies, and has outperformed the S&P 500 over the past five years. Another example is the iShares MSCI USA ESG Select ETF (KLD), which invests in companies that meet certain ESG criteria and has outperformed the S&P 500 over the past five years.
Different Types of Socially Responsible Investments
There are several different types of socially responsible investments available to investors. Impact investments are investments made into companies or projects with the intention of generating positive social and/or environmental impact as well as a financial return. ESG investments are investments made in companies that meet certain ESG criteria, such as having a commitment to sustainability. Other types of socially responsible investments include green bonds, community investing, and faith-based investing.
Risks and Rewards of Socially Responsible Investing
Like any other type of investing, there are potential risks and rewards associated with socially responsible investing. Potential risks include the risk of underperforming the market due to a lack of diversification, higher fees, and higher taxes. Potential rewards include the potential to outperform the market, the satisfaction of making a positive impact on society and the environment, and lower taxes.
Evaluating Whether an Investment is Socially Responsible
When evaluating whether an investment is socially responsible, it is important to follow certain guidelines. First, investors should research the company they are investing in and make sure it meets their personal values. Second, investors should examine the industry the company is in and make sure it is an industry they are comfortable investing in. Lastly, investors should consider the potential risks and rewards associated with the investment before making a decision.
Conclusion
Socially responsible investing is a way for investors to align their investments with their values while potentially generating competitive financial returns. There are several different types of socially responsible investments, such as impact investments, ESG investments, and green bonds. When evaluating whether an investment is socially responsible, investors should research the company they are investing in, examine the industry it is in, and consider the potential risks and rewards associated with the investment. For those looking to invest in an ethical and sustainable way, socially responsible investing is a great option.
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