The Growing Business of SRI

Do you have a favorite social cause? Is there something especially close to your heart?

What about the things you deem wrong? (Pardon us if we’re getting too personal.) Or things you believe are harmful to society? What’s your take on the future of humanity?

Okay, let’s make it simple: would you like your personal investments be aligned with positive social change? Or are you a little less concerned about how you make your money?

If you’re still reading – and if you answered the latter – then hopefully you’re starting to understand the principles of Socially Responsible Investing, or SRI.

The basic idea behind Socially Responsible Investing is to put your money where your morals are – by building a portfolio that seeks to maximize financial returns and contributes to certain ideals of social good.

As we wrote in 2020, today’s consumers believe that companies can make a positive difference in their communities, while making a profit.

And what do the numbers suggest in 2021? That it’s not just consumers who are looking to profit from the SRI trend. It’s the companies themselves, and the fund managers who invest in them.

In fact, U.S. funds alone committed to responsible investing practices attracted some $94.1 billion, according to Refinitiv, a global provider of financial market data.

What’s driving this shift toward socially-responsible investing? And how big can it be? We’ll dive into some prevailing trends below, and also discuss how you might approach your personal SRI strategy.

FROM PANDEMIC TO PROFIT – THE HEADWINDS BEHIND THE SRI MOVEMENT:

COVID-19 brought many challenges to investors. Beyond the physical toll, the virus created financial insecurity, and inspired l thought about what tomorrow’s economy will look like.

As the particles settle, it’s thought that SRI trends will shift toward a “focus on people”. Much of that will be led by Millenial and Gen Z investors, who place particular emphasis on the “S” part of SRI, a.k.a social. 

After all, COVID was a people-centered crisis. And last year, our humanity was tested in ways we never imagined – with the strains of health care systems on full display, our lack of social safety net exposed, and a fuse lit in the streets for social justice revolution.

According to Kiplingers, about $17 trillion in assets is under professional management. And in coming years, as Boomers begin their transfer of wealth, more is expected to fall under management. 

Known for their commitment toward social equity, these investors believe that they can not only impact change in their communities, but on the bottom line of companies they choose.  

Said another way … the business-savvy investor might argue that access to capital is what drives the future of development. While the idealistic investor could tell you it’s just “the right thing to do”.  

Either way, it’s a big trend in business. And it’s certainly worth exploring.

MAKING CAPITAL FROM CATASTROPHE?

As some have said, SRI investing is about putting money toward “the greater good”. And what greater good is there than saving Mother Nature?

While world shifts its focus away from COVID, and toward climate change, instruments called “catastrophe bonds” are being hailed as one of the next frontiers in socially responsible investing.

These securities are designed to safeguard against a slew of global warming-related incidents – which are expected to increase in coming years – by insuring against natural disasters such as hurricanes, earthquakes and pandemics.

To date, catastrophe bond issuance totals $36.3 billion, according to Bloomberg data. Which is a small-but-growing segment of an “ethical debt market”, which is now worth more than $2 trillion. 

In addition, social media pressure and shareholder activism are causing top execs at some of the biggest mining, oil and commodities producers in the world.

These investor-led revolts have caused shake-up in the C-Suite, and even resulting in terminations, such as the ouster of Jean-Sebastien Jacques, former CEO of Rio Tinto, who was forced to step down following a backlash against executive actions that were deemed not socially-conscious.

These shareholders see their particular roles as looking forward and mitigating risk, while ensuring financial stability and long-term value.

Time will tell if they’re right. But trends are certainly on their side.

A WORD ON INDIVIDUAL SCREENING, STARTING WITH GUNS:

There are lots of strategies for building a portfolio. In fact, they’re practically infinite. (You may ask us at Signet.)

One way to gain more control over the individual securities in your portfolio, and more closely align your investments with your values is by individually screening them.

Positive screening (or inclusionary screening) means to highlight and purchase certain stocks or sectors, based on their core focus. For instance, if you wanted to invest in green energy, you could screen for securities that focus on solar power, wind energy, and even nuclear, if you think that qualifies. 

Negative screening (or exclusionary screening) excludes certain securities from investment consideration based on social or environmental criteria. In other words … it’s the way you keep out stuff you don’t want.

In fact, the principles of negative screening are practically ancient. Some would argue they’re almost Biblical.

In “modern history”, during the 18^th century, Quaker commerce leaders in Philadelphia prohibited their members from participating in (and profiting from) the slave trade. So, exclusionary screening is nothing new.

In 2021, one of the biggest causes for social concern was firearm deaths and mass shootings.  And according to social media trends blog Mashable, many investors are looking to divest themselves of funds that hold securities for weapons manufacturers. Also, many investment firms are offering specific vehicles, such as ETF funds that screen out civilian firearms. 

Let’s say that you’re looking to move your portfolio away from firearms entirely. A Signet Wealth Advisor (or other financial pro) might screen for and steer you away from firearms manufacturers, importers, exporters, ammunition suppliers, hunting + sporting retailers, and military-related investments.

HOW SIGNET CAN HELP:

It’s 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.

LPL Tracking # 1-05138331

Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller. The return may be lower than if the adviser made decisions based solely on investment considerations. All investing involves risk, including loss of principal. No strategy assures success, or protects against loss.

The financial advisors at Signet Strategic Wealth Management are registered representatives with and offer securities and advisory services though LPL Financial, a registered investment advisor. Member FINRA/SIPC.

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