Written by Preet Banerjee
Monday, November 22nd, 2021
With concerns about climate change, violence, diversity, and other social issues becoming more important in everyday life, many people are looking for ways to help address these issues. It could be in the form of making changes in our lives, like avoiding plastic bottles, walking or using public transit over driving when possible, protesting and more.
Another avenue involves how we invest our money.
More and more investors are interested in expressing their support of different social values through their investment portfolios. They can choose to reduce exposure to companies that don't align with their values, and they can choose to increase exposure to companies that do. All of this can fall under the general category of "Socially Responsible Investing," or "SRI."
It's important to note there's a lot of terminology and buzzwords in this area. Some of this terminology overlaps and some of it refers to different aspects of SRI. Let's unpack some of the basics.
Different Names for Socially Responsible Investing (SRI)
SRI can sometimes simply be called: responsible investing, ethical investing, social investing, or sustainable investing.
Depending on where you look, you'll find slightly different names and exact definitions, but in general, think about it as investing in companies that address social issues and concerns in some way.
"Impact investing" falls under the umbrella of SRI, but whereas SRI generally seeks to avoid companies that contribute negatively towards certain concerns (not a hard and fast definition), impact investing generally seeks to make a positive contribution towards a goal. For example, investing in a company developing clean energy technology would be an example of impact investing.
What Are Some Ways to Address Social Issues with Your Investments?
There are a number of ways investment portfolios can be modified to align more closely with social issues.
ESG stands for Environmental, Social and Governance. By applying screening criteria for ESG factors, any company that doesn't meet those criteria could be excluded from the portfolio.
- An environmental factor might include a threshold for how big the carbon footprint (or carbon intensity) of a company is.
- A social factor could include screening for a high standard of labour conditions for workers of a multi-national company around the world. Some employees might live and work in Canada (where labour protections are stronger), and some employees of the company may live and work in less developed countries, where labour laws are less protective of workers. But a company that applies a higher than required standard may meet the ESG screen.
- Governance factors might include requirements to have defined gender and race diversity and inclusion policies, or require shareholder voting on executive compensation levels.
Generally, negative screening would involve excluding companies from a portfolio if they operate in industries that someone might be philosophically opposed to. For example, if you wanted to avoid "sin stocks," you would exclude companies that are involved in alcohol, tobacco and gambling.
A thematic investing strategy would focus on a particular theme such as clean water initiatives, or investing more heavily in companies with higher gender representation in senior management.
How to Adopt SRI in Your Portfolio
There has been an explosion of interest in investment funds that offer socially responsible investing principles. But not all SRI applications are created equal. Some investment funds and portfolios are marketed as socially responsible hoping to catch the wave of interest. But it pays to take some time to learn exactly how they are doing it to ensure that your social considerations are being addressed.