Socially responsible investing is a priority for individuals who are concerned about the sustainability and ethical impact of companies they invest in. The term “triple bottom line” suggests that in addition to financials, environmental and social factors should be considered when evaluating a company’s worth.
Financial returns have long been the priority for making an investment decision but social concerns started to gain attention as early as the 50s. In the 70s, for example, the contempt for the apartheid regime in South Africa resulted in the Sullivan Principles, a code of conduct for business practices in South Africa drafted by Reverend Leon Sullivan. Growing U.S. disinvestment in South African ultimately increased pressure to change the regime.
There are pros and cons of basing your investing decisions on social values but first some definitions:
Socially Responsible Investing (SRI) in general avoids companies affiliated with gambling, tobacco, and alcohol; weapons, animal testing, fossil fuel and other categories have been added over time.
Environmental, social and governance (ESG) can include:
Environmental: climate change, nuclear energy, sustainability
Social: diversity, human rights, consumer protection, animal welfare
Governance: management structure, employee relations, employee compensation
Other types of sustainable investing include Impact Investing, Faith-based Investing, Gender-Lens Investing and more.
The pros of making investment choices based on your values are pretty obvious:
You’re taking a stand and aligning your investing with your conscience
You’re rewarding the good guys, the companies you’ve chosen to back
What could be the negatives?
Chances are some great companies will be left off the list meaning you’ll give up performance
Companies sometimes claim to be socially responsible but aren’t – think Volkswagen
The definition of socially responsible can be pretty fluid, i.e. nuclear energy could be viewed as either clean energy or a grave risk to human health
Large, complex companies offering a variety of products and services worldwide don’t fit neatly into any particular slot
It’s hard to serve two masters: financial returns and social concerns. Perhaps focusing your investing goals on the returns offered by broad indexes while supporting your social concerns through career choice, community involvement and philanthropy affords the best outcomes for both you and the world.
For lots more detail click here.