Sustainable, responsible and impact investing (or SRI), has taken off as an investment strategy, and now more than ever, the way you invest money can help support positive social change as a result.
You may have also heard the terms “ethical investing”, “triple bottom-line investing” or “green investing”, as well.
We’ll dig into some of the most popular and well-known SRI trading approaches in 2021 – as well as some potentially surprising sources of social responsibility.
Exclusions in SRI
First, it’s important to identify what is NOT applicable to a stock that is SRI-conscious. MSCI identifies the following exclusions when it considers what a socially responsible investment looks like:
Genetically Modified Organisms
With that out of the way, let’s dig into some types of SRI approaches.
If you’re new to SRI investing, you may have already been practicing some of its core tenets, just by simply avoiding stocks, bonds and securities that don’t ‘jive’ with your personal values.
ESG Integration is a term that’s often used when talking about SRI. ESG stands for “environmental, social and governance”. The PRI (Principles For Responsible Investment) defines ESG integration as “the explicit and systematic inclusion of ESG issues in investment analysis and investment decisions.”
Which simply means that if sustainability (SRI) is your toolbox, ESG is a main tool for identifying and informing your decision-making. ESG data is often considered “non-accounting” information, because it integrates information for company valuation that is not traditionally reported.
Some of these more intangible elements, such as brand value, reputation and decision making by company management, are tough to value traditionally, but are crucial parts of a company’s value -- and also affect operational efficiency and future strategic decision-making.
Just by proactively considering ESG criteria, as well as financial analysis, you’ve already taken a first step. And integrating this knowledge into your investment decision-making is viewed as a good approach.
It’s good to know what you personally value – and what you’re looking for in a set of investments. It’s also good to know what you don’t want. That’s where Restriction Screening comes in.
Loosely defined as the exclusionary, negative or values-based screening of investments, Restriction Screening mostly means intentionally avoiding investments in certain sectors, or issuers based on values or risk-based criteria.
As we mentioned above, there are certain categories and industries that rarely, if ever, find their way into an ESG-conscious investor’s portfolio. Things like tobacco companies, weapons manufacturers and food conglomerates are certainly not popular among ESG investors.
It’s the practice of Restriction Screening that keeps these industries and companies out of your portfolio. You might also see it referred to as ‘values investing’ or ‘faith-based investing’.
Is there one cause you’re particularly keen on? It could be as big as helping halt global climate change, or as small as protecting wetlands in your home state.
That’s where Thematic Investing comes in. It’s loosely defined as pursuing investments that follow sustainability tenets, such as water, clean energy, agriculture or social justice – and practicing Thematic Investing involves favoring your investments toward these themes and sectors, especially the ones looking to solve global and sustainability-related challenges.
In order to implement this, you might seek to make investments that intentionally generate measurable positive social or environmental outcomes. There are many ETFs (or electronically-traded funds) and other financial products that specialize in this.
Many incorporate ‘megatrends’ – which are longer-term trends affecting the world – and look to maneuver market-affecting trends such as the decrease of natural resources, world population growth, and more.
Shareholder Engagement / Activist Approach
If you really want something done, sometimes you have to do it yourself. That’s the approach of Shareholder Engagement.
There are many ways to go about this Activist Approach – including shareholder resolutions, voting proxies, and privately engaging with companies on ESG issues – in order to achieve your positive desired results.
While this may conjure thoughts of 80’s-style corporate raidership, many shareholders are finding it the most effective way to see their wishes reflected in corporate activities.
Much like Thematic Investing above, Impact Investing seeks to affect change on specific socially-beneficial and environmental causes. But impact investing itself seeks to make a more direct impact.
The term “impact investing” emerged around 2007, and referred to particular investments “made into companies, organizations and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return,” according to Wikipedia.
What separates impact investing from thematic investing is the actual commitment to objectively measuring social and environmental performance, with the same focus you would apply to financial performance.
Like thematic investing, there is a wide array of specialized financial products available, such as ETFS, many of which come with readily-available data on the depth of your investment. But your approach to impact investing may include methods such as angel investing, digital microfinance, or syndicate or pooled investing as well.
How Signet Can Help
It is our mission to provide investment resources and strategies to clients and financial institutions helping them develop a greater knowledge and passion for sustainable, responsible and impact investments. Let us help you find your mark with our experience.
The return of Environmental, social, and governance investing may be lower than if the adviser made decisions based solely on investment considerations.
No strategy assures success or protects against loss.