A few years ago, I started asking myself how I would like to make an impact with my investments. I have had stocks since I was a young kid-thanks to an investment savvy grandmother-and as I grew old enough to start choosing the companies I wanted to invest in, I would choose companies that I thought would give me the biggest returns. After a while, however, I began to want to support companies that were being responsible and thinking about more than the bottom line.
I was becoming more and more disappointed with the disregard for any social or environmental ethics when it came to business practices. Nike, a company from my home town for example, had been caught paying their employees overseas practically nothing. Oil was being spilled into oceans, animals were being mistreated, and nothing seemed to matter in the market but producing things as cheaply as possible.
Consequently, I began to look into mutual funds and index funds that consisted of socially conscious businesses. I started to invest in companies that were treating animals humanely, who were decreasing their emissions, who used biodegradable products, and who were working on green energy. I wanted to support companies who wanted to make a positive difference in the world.
What is Socially Conscious Investing?
Socially Responsible Investing (SRI) is also understood as Sustainable, Responsible Impact Investing. According to this article on Investopedia, to be considered a company classified as SRI (Socially Responsible Investing) or ESG (Environmental, Social, Governance), you need to be meeting some of the standards on this broad list:
- General environmental sustainable practices
- Responsible energy use
- Limiting pollution
- No animal testing
- Ethical animal treatment
- Ethical treatment of employees
- Safe work environments
- Fair wages
- Products that don’t harm humans
- Ethical Management
- Transparent business practices
- Good board and shareholder relations
- Company foundation for charitable donations
- Company volunteer programs
Why Give a Damn?
Now that you have an idea of what socially responsible investing is, here are three reasons why you should take the plunge.
1. Make an impact.
Impact investing is satisfying. Not all of us can be entrepreneurs, but we can support those companies that share our vision for a better world. We’re all drawn to specific causes, our heart strings are pulled by different problems, so ask yourself how you want to make an impact with your investments.
Personally, I am interested in supporting electric car battery recycling companies. I think that electric cars are the future of transportation, but filling our landfills with old batteries has been a big obstacle. I am excited to make a positive impact on the environment by supporting the electric car industry.
Other ways to make an environmental impact with your investing is to buy shares of a company working on renewable or green energy. Or invest in companies that try to lower their carbon footprint and cut down on their energy use.
Maybe your heart is pulled more towards human rights issues. Look for companies that pay their workers a living wage and implement ethical working conditions. Support social equality by investing in companies that are minority led or that work hard to diversify their workforce.
2. Expect Great Returns from Socially Conscious Investing
Surprise! Companies that implement ethical practices can be extremely profitable. According to an article from Arabesque, a socially responsible asset management firm, socially responsible businesses are often the better investment choice.
In a nutshell, academic literature suggests that good ESG performance is linked to less market volatility, lower risk, and better financial performance. A meta-study published in 2015 by the University of Oxford and Arabesque titled “From the Stockholder to the Stakeholder” summarized approx. 200 scientific sources on the economic effects of sustainability and found that good ESG performance is linked to better stock price performance (80% of the studies), better operational performance (88% of the studies), and lower cost of capital (90% of the studies).
Those are some pretty compelling stats that support the economic incentives to invest ethically. However, some companies are found to be socially responsible, but they may still not align with your personal values. ESG investing, for instance, cares more about sound business practices that drive returns as opposed to specific ethical standards. A company that decreases its energy consumption, for example, saves money, thus increasing their profit. This also positively affects the environment, but you can see where the intentions of perceived “responsible business practices” may not be so clear.
Additionally, ESG rated companies may have excellent workplace and environmental practices, but produce things that you may want to support such as, tobacco or firearms. It’s up to you to determine where you stand on SRI/ESG investing, and it’s important to do your own research into the companies that are deemed socially responsible.
3. Make Socially Conscious Business Practices the Norm
In a perfect world, business and responsibility to the environment and humanity would go hand in hand. According to a study shared on Institutional Investor, “only 39 percent of 18-to-24-year-olds and 35 percent of 25-to-34-year-olds were “more concerned in investing in a company that provides high returns on investment rather than social/environmental issues.” These numbers compare with 47 percent of 35-to-44-year-olds.” It’s heartening to see how more than 50% of young investors are more concerned about contributing to a greater good than building their personal wealth.
When we buy SRI, we are voting with our dollar. Companies will have to become more socially conscious when they begin to see a drop in investor support by this younger generation with big values. We see this all the time. When we began to reject trans fats, for instance, companies started removing trans fats from their food products. When we demanded more humane treatment of animals, we got more vegetarian, vegan, and ethically raised livestock options. The market follows the demands of the consumer. When we start to invest in only socially responsible businesses, other businesses will begin to follow suit.
There you have it. Three reasons to go SRI! I hope you start to put your money where your heart is.
Here are a couple of sites to get started on SRI/ESG investing.