Socially responsible investing is the process of embedding moral, social, and environmental screens into investment decisions. Investors are concerned about issues such as preserving the environment, natural habitats, human rights, protecting against animal cruelty or overfishing. Today’s investors are demanding that companies they invest in share their values.
How to Undertake Socially Responsible Investments
Many people wonder how they can invest in socially responsible business and organizations in a way that is ethical and beneficial to both the investor and the company. There are a few ways to do this, and typically the most important thing for an individual or institution looking to invest in socially responsible companies is that their intent be clear. There are many ways to invest in a socially responsible company:
Social Accountability: This is a way of investing in businesses that operate under acceptable ethical standards not only because it is profitable, but also because their business practices directly benefit society as a whole. An example of this would be investing in companies that donate their profits (other than the free cash flow) to charity or non-profit organizations. Another example would be investing in businesses that provide products for people on low income who cannot afford to pay for those products themselves.
Environmental Sustainability: This is a way of investing in businesses with environmentally friendly products or services. It has been predicted that by the year 2020, the primary method of producing electricity will be through renewable means such as solar, wind, and water power. Investing in these companies would help reduce greenhouse gases. Another example would be investing in companies that produce goods from recycled materials to reduce waste and pollution from manufacturing processes.
Social Impact: This is a way of investing in businesses whose work directly affects the lives of low income people or improves their quality of life. An example would be Home Depot providing jobs for the economically disadvantaged – there are currently over 300,000 individuals who have jobs because Home Depot employs them. An example would be a company that produces clothing for the homeless, where a large portion of their customers are made up of homeless people.
The Green Chip Investing model is an alternative way of investing in socially responsible companies. It’s a way of using criteria other than profitability (revenues, productivity, etc. This has its advantages and disadvantages as well, but one of its advantages is that it can be more difficult to determine exactly how a company’s product will affect society, but there are more methods for taking into account such factors as costs and environmental benefits (relating to air quality, water pollution, waste management). The Green Chip Investing model requires an organization to be listed on a third-party index such as the Dow Jones Sustainability Index. To make investments using this model, funds must first go through an accredited institutional investor (AII). An AII is a financial intermediary that is required by law to make certain that the criteria for inclusion on an index are met. The Green Chip Investing model has a value to investors looking for a way to invest in socially responsible companies.
Advantages of Socially Responsible Investments
Income from investing in these companies is great because these companies typically have greater potential to grow and not only give back to society, but also increase in value. A company can be placed on an index which is a list of stocks from the most successful companies with high sustainability ratings. In the US for example, the Dow Jones Sustainability Index contains about 60 stocks with a wide range of industries and geographic locations. These indexes are perfect for investors looking for funds to invest in socially responsible companies.
Disadvantages
Disadvantages of investing in socially responsible companies are that it is sometimes more difficult to determine exactly how their products will affect society, and it can be more difficult to get information. Many organizations that give annual or quarterly reports often don’t know how their organization will perform financially in the future. This limits investors’ options especially for international investors who may not want to invest in companies with significant operations overseas.
The basic idea of investing in social responsibility is to make profit by investing in companies that are good for society. The return on these investments may be lower than other investments, but Fintalent’s Stock Valuation Consultants advice investors to also consider other factors like how long they will hold the stocks for. If they plan to hold them a long time, a low return may not be a problem. The risk associated with SRI is considered very high because these stocks do not have a high return or have a low return because of ethical or moral reasons.
