Socially responsible investing (SRI) is an investing approach that focuses on investing in companies that are considered to be socially responsible in the way that they conduct business. This may be in terms of their focus on the environment or on doing business in a way that promotes the well-being of customers and society in general.
Sustainability is a popular theme in the SRI world. Companies that adhere to policies and business practices that help promote the environment are an example of an SRI friendly investment.
The Rise of ESG Investing
Environmental, social and governance (ESG) investing is an outgrowth of SRI investing. ESG investing has gained in popularity in recent years among investors who are socially conscious.
Investing in firms that adhere to the principles of ESG can be a way to screen well-run companies. For example, companies that avoid environmental issues will generally not face fines from the government for violating pollution and other standards. This is money that can be put back into the business to help fuel future growth.
This applies to all aspects of ESG. Companies that manage in a socially responsible fashion will tend not to discriminate in their hiring practices. This not only helps avoid any lawsuits regarding discrimination, but it also helps them find the best employees regardless of their demographic standing.
Identifying Your Values and Objectives
As part of your overall investing strategy, it is a good idea to identify values that are important to you in terms of where you invest your money. There are a number of factors to consider when investing. These include your financial goals, your risk tolerance and your time horizon or the funds. You will also want to consider the financial merits of any investments you are considering. SRI and ESG factors can certainly be a part of this analysis.
Investing in ESG and SRI oriented companies can be profitable if you do your research. Studies have shown that many ESG funds have experienced lower than average downside risk and a significant number have experienced solid relative performance compared to peers in recent years.
Researching Sustainable and Responsible Funds
With the popularity of socially responsible investing, including ESG investing, in recent years, there are several places to research these types of investments. MSCI has developed a rating system for over 8,500 companies worldwide providing grades on their compliance with various ESG standards.
Morningstar has added sustainability ratings to their analysis pages for individual stocks, mutual funds and ETFs. The rankings take ESG factors into account as well as other metrics.
Diversification and Risk Management
In selecting SRI and ESG oriented investments, consideration still needs to be given to factors such as diversification and risk management. SRI and ESG investments can be spread over a variety of asset classes such as stocks and bonds and various sub-asset classes within those broader categories.
Additionally, these socially responsible investments can fall within a variety of sectors and industries. Investors who feel that social responsibility is an important part of their process should still be concerned about the basics of implementing their investment strategy.
Performance and Returns
Contrary to what some might believe, investors do not have to sacrifice investment performance to adhere to their SRI or ESG principles. Over time, several studies have shown that ESG and related investing criteria do not hurt investment performance, and instead, these factors can also enhance performance.
The consulting firm McKinsey says that studies show that strong ESG performance is closely correlated with higher returns on equity investments and less downside risk on these investments.
The NYU Center for Sustainable Business analyzed over 1,000 studies and they have shown that strong corporate ESG management is linked to higher returns on equity and returns on assets.
Choosing the Right SRI Fund
Part of the process is deciding what criteria in the SRI and/or ESG space are important to you. These criteria can vary from looking for funds that adhere to beliefs tied to your religious beliefs or that perhaps focus on firms whose business operations are environmentally friendly.
Doing your research on funds and ETFs is important. Use sites like Morningstar and be sure to read and understand the fund’s prospectus and other literature if doing this yourself.
If you are working with an advisor, be sure to let them know what is important to you as far as socially responsible investing, as well as your overall financial goals and objectives. Your Wedbush Financial Advisor can be a valuable resource if SRI and ESG factors are important to you.
Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor.
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