Socially Responsible Investing

Socially Responsible Investing (SRI) is the practice of investing with both a financial and a social goal. It is sometimes referred to as sustainable, socially conscious, mission, green, or ethical investing[1]. SRI is in many ways is a means of social activism. Investors reflect their interests, social concerns, and politics through their investments. SRI continues to grow as demand rises from socially conscious investors. Clients are particularly galvanized around issues of human rights, weapons and tobacco.  In 1995, SRI investments in the United States were $639 billion compared with $3.74 trillion in 2012. Firms are incentivized to promote SRI because it is good PR and there is little performance tradeoff between SRI strategies and traditional strategies[2].

Many socially responsible investors manage their funds through screening companies, counties and municipalities for certain positive or negative policies[3]. Screens can be characterized three ways:

• Negative Screen- the practice of not investing in companies whose products and business practices to not meet those investors’ standards (morally, ethically, environmentally, etc.)[4].
• Positive Screen- the practice of selecting companies with strong corporate social responsibility platforms to invest in[5].
• Restricted Screen – the practice of incorporating companies into a portfolio who may have questionable practices only if those practices are deemed to be “not that bad.[6]”

Through these screens fund managers can assemble portfolios which match the ethical and moral outlook of investors. Investing becomes a means to support the firms which do good and “punish” those firms that do not. In the same way that Investing is a method of activism. So is divestment. The best example of this was the campaign to divest from apartheid South Africa. In an international campaign, which lasted from the mid-1960s through the late 1980s, activist’s targeted companies with operations in or relationships with South Africa. Paired with traditional methods of activism (workshops, film showings, picket lines and consumer boycotts), divestment caused billions of rand to leave South Africa adding to the pressure to end apartheid[8].

Clearly SRI has a role to play in promoting social good and activism. This being said I have personally found some limitations to SRI. These include:

1.  Lack of public information regarding a company’s social and environmental practices. Regulations concerning the disclosure of social and environmental impact are hard to come by. Many companies have corporate social responsibility reports, but with no regulation around what should be included in these reports it is hard for an investor to know if they are getting the full picture. On the bright side, more and more guidelines are coming out around sustainability accounting and reporting, so investors will definitely have a better picture moving forward.
2. Difficulty monitoring changes in company policy. Companies change policies all the time. Depending on how often an investor monitors his or her portfolio, it can be difficult to keep track of whether or not the companies in their portfolio still pass their screens.  
3. Limited opportunities to practice shareholder advocacy. One of the benefits of owning equity stocks is the ability to participate in shareholder advocacy. But unfortunately, if an investor does not own a significant portion of the business there are limitations to how they can direct the overall vision, strategy and operations of a firm.

---

[1] Chamberlin, Micheal. (2013 April 23). Socially Responsible Investing: What You Need to Know. Forbes. Retrieved from http://www.forbes.com/sites/feeonlyplanner/2013/04/24/socially-responsible-investing-what-you-need-to-know/.

[2] BNY Mellon: Invested in Market Integrity. (2013 June 12). What’s Driving the Growth in Socially Responsible Investing?. 3bl Media. Retrieved from http://3blmedia.com/News/CSR/Whats-Driving-Growth-Socially-Responsible-Investing.

[3] Chamberlin

[4] http://www.sriconference.com/d/SRIC14GlossaryofTerms20140410.pdf

[5] http://www.sriconference.com/d/SRIC14GlossaryofTerms20140410.pdf

[6] Hodes, Jocelyn Black. (2013 June 2). What is Socially Responsible Investing?. Yahoo Finance. Retrieved from http://finance.yahoo.com/news/socially-responsible-investing-000000182.html.  

[7] harringtoninvestments.com

[8] Counts, Cecelie. (2013 January 27). Just One Weapon in Battle Against Apartheid. The New York Times. Retrived From http://www.nytimes.com/roomfordebate/2013/01/27/is-divestment-an-effective-means-of-protest/divestment-was-just-one-weapon-in-battle-against-apartheid.