Traditional investment methodologies spend a lot of time analysing companies based on their financial performance - after all, most investors are only concerned with investing in companies which earn them great financial returns, right? Well actually, the way we think about investing has been evolving in recent years...
Socially Responsible Investing, or SRI, is a high-level name for any investing strategy which also takes into consideration the real world / non-financial implications of an investment.
In recent years, investors have started to pay more attention to the activities a company carries out and the way it is being run - and are now avoiding investing in certain companies if they don’t meet some additional criteria. For example, depending on your values, you might be reluctant to invest in a company if you knew they produced weapons, tobacco, oil & gas, exploited / discriminated against workers or were serial polluters.
This, in a nutshell, is what we refer to as “Socially Responsible Investing”. So, how do you ensure you’re a socially responsible investor?
Well, the widely adopted method is to first begin with traditional financial analysis to narrow down potential investments into a “shortlist” (we still want to earn those exciting returns, after all!). But then, you would take that shortlist and check whether each company meets specific standards based on what you care about. If it doesn’t, wave "bye-bye” to the potential investment and focus on the remaining companies in your shortlist!
We think you’re probably a responsible individual who cares about society and the world around you 🌍. If that’s the case, where do you start when thinking about which standards to apply? A starting point would be to take your shortlist of potential investments, and put on one or more of the following “goggles” 😎 to filter further:
Environmental, Social, Governance (ESG)
Answering questions such as “Does this company pollute / otherwise cause significant, irreversible harm to the world around it?” or “Does this company directly or indirectly facilitate human exploitation?” or “Is this company controlled by individuals who are paid way too much or whose values I don’t particularly approve of?”
These kinds of questions will help you figure out if a particular investment is suitable according to your own values
An ethical investing screen would eliminate any companies from your “shortlist” which cause harm to the world in a way which you don’t approve of. This approach would require you to exclude entire industries such as tobacco, alcohol, weapons or oil/gas/coal producers
This is an easy way to ensure you aren’t investing in any “nasties” which make your stomach churn! 😖
An impact investing strategy would go one step further, and specifically look to identify only the industries / business activities which you really care 💚 about advancing
For example, if you were really worried about climate change, you would invest in solar panel companies or wind turbine manufacturers trying to move the world away from fossil fuels. Or you might just invest in Tesla - that’s totally cool, too 😉
Bonus points: For an analogy which might be more relatable, continue reading…🤓
Think of your potential investments as a group of friends. Let's call them Jack, John and Julie - 3 people who you’ve gone to a restaurant with (stay with us here, it’ll be worth it - we promise!)
Jack drops his dinner plate, becomes aggressive with the waiters and demands free food for the table, making you uncomfortable in the process. Jack fails the “ESG” check by exhibiting a pattern of negative / harmful actions to those around him. And just like that, you’re no longer friends with Jack...
John turns up to the restaurant having forgotten to shower for the past week. Nothing particularly wrong with that...🤢 but you decide he’s probably not someone you want to be associated with! John fails the “Ethical Investing” screen by possessing inherent traits which you don’t really like. It’s not his fault - that’s just the way he is, but just like that, you wave goodbye to John...
Finally, you’re settling up the bill at the end when both you and Julie decide the waiters deserve a healthy tip, and on your way out you both decide to leave a generous donation to the restaurant’s chosen “Charity of the Month”. You decide to spend more of your time investing in building your friendship with Julie - your “Impact Investment” - someone who shares the same values you do!
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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