What is Socially Responsible Investing (SRI)?

One of the biggest changes ever in the investment landscape has been the move in recent years to Socially Responsible Investing (SRI). While the concept may have begun in our country as an activity associated with religious societies – the Quakers not participating the slave trade – it has evolved immensely since. It is now a mainstream practice being embraced by both individuals and corporations.

Gone are the days when investors solely focused on factors such as diversification, investment income, rate of return, inflation, taxes and risks.  Nowadays, socially responsible investors are going one step further. They are also choosing to factor in whether a particular investment positively impacts society.

In other words, socially responsible investment works the same way as any style of investing. But in addition to the financial returns from an investment, it also considers the investments’ impact on environmental, ethical or social change

It enables you – the investor – to grow your money while doing good. And it allows you to invest in social causes you care about. 

Why Choose Socially Responsible Investing?

Who wouldn’t want a great way to boost their assets while also making a difference? That’s what SRI does.

Socially responsible investments seek to maximize the welfare of people and their environment while earning a return on one’s investment that is consistent with your individual goals.  In simple terms, the twin goals of socially responsible investing are: social impact and financial gain. 

Some question whether a do-good investment strategy can perform as well as standard investing strategies. The answer is yes. 

A 2020 research analysis from the asset management firm Arabesque Partners found that 80% of the reviewed studies demonstrated that sustainability practices have a positive influence on investment performance.

Several other studies have shown that SRI mutual funds can not only match traditional mutual funds in performance, but they can sometimes perform better. There is also evidence that SRI funds may be less volatile than traditional funds.

Even today, there are some that have doubts about socially responsible investing. Opponents have argued that by narrowing the field of investment options (such as avoiding weapons makers, gambling and tobacco stocks), the end result is a narrowing of investment returns. 

But now, there is a growing body of evidence (in addition to the aforementioned studies) that shows the opposite is true: SRI not only makes you feel good, but it’s also good for your portfolio.

What’s the Difference Between SRI and ESG Investing?

While at first glance, both SRI and ESG (Environmental, Social and Corporate Governance) investing look at a company’s broader impact, there are some distinct differences between the two.

First off, SRI investing is not as well defined as ESG investing. SRI is more subjective and based on an individual’s view of the world – political views, what is right and wrong, and what is ethical, etc. 

In contrast, ESG investments are measured by and scored on specific environmental, social and governance metrics. More specifically, ESG investing looks at specific factors, such as a company’s best practices when it comes to pollution or women’s rights

SRI, on the other hand, takes these factors into account and blends them with an investor’s personal values.

Bottom line: SRI involves screening investments to exclude businesses that conflict with the investor’s values. While ESG investing focuses on companies making an active effort to either limit their negative societal impact or deliver benefits to society (or both).

How to Participate in Socially Responsible Investing?

You have a number of options available to you if you want to invest in good causes. You can make socially responsible investments via individual stocks. However, the better (and safer) bet is to do so through socially conscious mutual funds and exchange-traded funds (ETFs).  A simple search on Magnifi indicates numerous ways for investors to access SRI funds with low fees.

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The information and data are as of the May 28, 2020 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.

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