Socially responsible investment, or SRI, is a way to put your hard-earned money to work while also contributing to creating a positive impact in the world. A socially responsible investment brings financial returns and considers the environmental, social, and ethical impact of the investment.
However, identifying the ventures that positively impact society while being a good investment is challenging for most investors. So, read on to know more about SRI and how to build a socially responsible investment portfolio.
Socially responsible investment or SRI is an investment strategy that has a social cause besides giving financial returns. It involves investing in companies that champion social and ethically conscious themes, including social justice, environmental sustainability, anti-discrimination, and corporate ethics. Following are the primary areas that SRI covers:
- Environmental impact: It involves promoting waste management, alternative use of energy, clean technology, water conservation, and similar concepts.
- Social responsibility: It includes investing in companies advocating social causes such as women’s safety, community development, human rights, and the like.
- Corporate governance: It encourages a diversified workforce and active leadership while curbing corruption, lack of corporate transparency, and other forms of mismanagement.
To know more about SRI and how it is different from other sustainable investments, read our article on impact investing vs. socially responsible investing on the Teji Mandi blog.
Types of Socially Responsible Investments
There are different ways to invest your money responsibly. These include:
- Choice picking from the stock universe: While building their portfolio, investors get the freedom to pick out the stocks that align with their ideas of sustainability. It becomes possible for them to choose their favourite companies that follow socially responsible practices and invest in their stocks. However, this involves a lot of deep research. It is vital to look at the returns that these stocks offer, and not just their viability as a sustainable stock, so that you accomplish your financial goals as well. Moreover, keeping a regular track of the company’s financial performance, ethics, and organisational practices is important. A company engaged in providing sustainable goods and services may not necessarily be socially responsible in every aspect. For instance, in May 2022, the Tesla stock was removed from the ESG index due to a low-carbon strategy, poor working conditions at factories, and instances of racism in the organisation. So despite manufacturing electric vehicles that are environmentally friendly and energy-efficient, Tesla would not be classified as a socially responsible organisation.
- Mutual Funds and Exchange-traded Funds (ETFs): Mutual funds are investment vehicles that pool money from multiple investors to invest in securities. ETFs are similarly a basket of securities but ones mirroring a benchmark index, bought using pooled finances of many investors. ETFs are freely tradable on the stock market, and that makes them more liquid than MFs. Several ETFs and mutual funds have ESG as their underlying theme that makes the composition of these funds ESG-compliant and great options for diversified investment within the socially responsible investment segment.
- Microfinance: Microfinance refers to financial services offered to persons or entities from lower socio-economic backgrounds, who lack access to traditional banking and financial services. Individuals and MSMEs find credit difficult to come by due to collateral and documentation requirements. Microfinance includes several services, from checking and savings accounts to fund transfers, microcredit, and microinsurance. Offering small loans– or microloans– to startups is another way individuals can make socially responsible investments.
- Community Investments: Community investments are socially responsible investments that help investors earn financial returns while contributing to social causes. It allows you to direct your investment toward essential community services such as job opportunities, affordable housing, healthcare, child care, and education. Development financial institutions (DFIs) are organizations that provide funds in the form of credit for the use of capital-intensive projects, to people and businesses that otherwise could not obtain financing. These projects are mostly long-term investments that help the overall development of the country, such as improving infrastructure, building dams and irrigation facilities, mining, and more. The capital is extended on a non-commercial basis and helps in the promotion of sustainable development and job creation.
Now that we know the various avenues for socially responsible investments, let us see how to start investing in them.
Although SRI includes several types of investments, they all have one theme: positive social impact.
Below listed are the key approaches socially responsible investors use to ensure their investment achieves the desired social goal:
- Positive investments: In this approach, investors seek out companies engaged in a social cause such as environmental sustainability, clean technology efforts, alternate energy solutions, and the like. Say you are environmentally conscious with an interest in pro-environment ventures. Thus, your portfolio will typically comprise investments in green energy, and you will be more likely to associate with companies that promote sustainable practices.
Examples of sustainable/green practices include water conservation, workplace recycling programs, using energy-efficient equipment, and going paperless. - Negative screening: On one hand, SRI promotes socially responsible ventures, and on the other, it discourages investments in companies that leave a negative impact on society or the environment. Hence, negative screening involves screening a company’s products/services and practices before investing in it. For instance, a socially responsible investor will not invest in ‘sin companies’ – companies that manufacture or sell alcohol, tobacco, gambling, and other addictive products or activities.
- Community investing: Community investment is one of the best approaches for investors looking to build an SRI portfolio. It involves putting money into enterprises that focus on economically uplifting local communities, while earning returns for the investor.
Community investments are typically directed towards organisations with a reputation for social responsibility and can pool funds from other financial institutions. The funds enable these organisations to provide essential community services such as affordable loans and housing, healthcare, education, and so on. You have many options to pursue a community investment strategy, including agency bonds, community development banks, municipal bonds, and community development loan funds.
Socially responsible investing comes with building a diverse portfolio which reflects the values of sustainability. Let us see how you can do so.
Building a Socially Responsible Portfolio
Building a portfolio that reflects your social and environmental ethics is not difficult if you know your values (that you are also looking to incorporate in your investments) and investment goals.
Below are the steps to help you create a socially responsible portfolio:
- Align your values with your investment goals: Before you try your hand at SRI, it is crucial to ensure that your values align with your investment goals. While investors are usually told to think with their heads instead of their hearts, SRI is where you can bank on the latter. So, before you take the plunge, reconsider your personal beliefs and values and whether they tie to your investment.
Revisit the SDGs set by the United Nations on issues such as affordable and clean energy, quality education, gender equality, and climate action. Hence, you can determine which companies are committed to furthering the goals that matter to you while maximising returns. - Determine the amount of help you need: The next step is to decide whether you want to pick the companies yourself based on ethical grounds or if you need expert help. You can build your SRI portfolio yourself by selecting specific investments and monitoring them over time.
Alternately, you can look to experts for help and get outside expertise to make informed decisions. The experts at Teji Mandi offer active investment advice and help you curate a diverse portfolio based on your goals and risk appetite. You can reach out on our website and help let us help you filter out the best socially responsible investments. - Open a brokerage account: You must open a brokerage account if you choose to build and monitor your SRI portfolio yourself. A brokerage account is an investment account that lets you buy and sell bonds, stocks, mutual funds, ETFs, and other financial instruments.
This will help you invest seamlessly by making it easier for you to find the right funds for your socially responsible ventures. Some brokerages offer better socially responsible investing options than others, where they carry out an in-depth evaluation of probable companies based on their social responsibility parameters before making any investment decision. - Research your investment options: Once you are clear about your SRI goals and have a brokerage account, start building your portfolio with what matters to you the most.
As mentioned before, there are quite a few avenues you can explore to build a sustainable SRI portfolio. These include mutual funds, ETFs, community investing, microfinance, and individual stocks. However, individual stocks shouldn’t make up more than 5-10% of your portfolio, unless you find a company with promising growth prospects. Net income, revenue, work culture, workforce diversity, and sustainable policies are some factors to look out for when considering a company.
The Teji Mandi app helps you do your research with just a few taps on your screen. With regular updates from the market, it simplifies investing in stocks and makes investments hassle-free. Download the Teji Mandi app now to get started!
Conclusion
Socially responsible investment has several benefits, from improving the world to giving investors an opportunity to earn significant financial returns. If you are looking to give back to society and eschew unethical companies, an SRI is the best way. However, social responsibility may not be a priority of many companies, and you might be restricted in terms of avenues for investment apart from needing extensive research before making a call.
