Socially Responsible Investing

Socially Responsible Investing

Socially responsible investing, you can find under the names: social investment, also as sustainable, socially conscious, “green” or ethical investing.

It is an investment strategy which tries to view both financial return and social or environmental good. That means to produce a positive change in both fields.

Socially responsible investors have different aims for their investments. But one thing is crucial, they always examine moral, human, environmental and governance standards as well as a financial return.

They are focused on companies which manage a business that have a socially positive impact.

Also, they could eliminate companies which have a negative social impact.

One common practice of socially responsible investing is through ETFs. There is a wide array of socially responsible ETFs that support ethical principles.

There are several goals for sustainable, responsible and influence investing. Investors may have personal reasons and goals, or institutional purpose. Also, they may support the demands of clients. Sustainable investors aim for strong financial performance. But they also believe that these investments can provide to progress in social, environmental and governance systems. 

They may venture investments, that will provide important social or environmental goods. To this corpus goes community development loan funds or portfolios with cleantech. 

Some investors adopt SRI strategies to manage risk and meet commissioner responsibilities. The others adopted SRI criteria to evaluate the status of management and the possible flexibility of their portfolio companies in dealing with future difficulties. Some just want to find a good investment over the long term.

These rules serve many socially responsible investors choose which companies or funds to invest in. Very often, that is the companies which respect the environment, manage their employees and suppliers honestly and support ethical behaviors.

Some investors think that companies that function as a good partner with their countries can yield higher returns than those that don’t.

Recently, some academic research shows a strong link between ESG and financial performance.

Socially responsible investing does not surely end in poorer performance. There are investors that truly believe that green investing can beat the markets. Of course, there are those who strongly believe the opposite. There are examples that will back up both sides.

 

People are often asking  “what is a social business?”, and they frequently want the answer to the question “what is social investing?”. It stands for social impact investing, sometimes it just affects investing.

Impact investing means recognizing risk, return and influence when making investment choices, and deciding to invest in companies that are generating sure social or environmental impacts. It is a step more than deprive of negative forces. 

For instance, moving your investment portfolio away from oil investments. It means you want to use your money to solve society’s dares. Of course, you will make a profit too.

Investors often ask how much return they will have to trade off until making impact investments.

As first, there is no “impact force”. Just because a business is creating a positive social impact, that doesn’t mean they are giving less financial return. 

Actually, the more impact they build, the more profit they make. Some impact-focused companies are better for long-term investors.

As it is with any investment, there are different levels of risk and return. Meaning, when is riskier, you will get higher returns and higher impact. 

Or, it could be less risky.

It always depends on the business or the fund.

The statistic shows that almost 90% of investors making impact investments are satisfied with their returns, and 54% of them are targeting average or higher returns.

There are many ways to get involved in impact investing. 

Generally, our investment prediction that this kind of investment will be more popular in the next years.

Chart example

More and more investors adopt a socially responsible screening when building their stock portfolios. This raises the question: Could these investors increase their execution by including screens into their investment process. To find the answer, we are simulating a simple trading strategy. This one is based on research about socially responsible by KLD Research & Analytics. The strategy is: “Buy stocks with high socially responsible ratings and sell stocks with low socially responsible ratings.” 

We find that this strategy gives high unusual returns of up to 8.7% per year. 

The maximum returns are produced when investors employ the best‐in‐class screening approach. They have to use a mixture of several socially responsible screens at the same time. Also, you have to limit yourselves to stocks with extreme socially responsible ratings. The abnormal returns continue meaningful even after taking into account transaction costs.

The best known social socially responsible companies investing are: 

Ben & Jerry’s. This company has a reputation for social responsibility that goes back to its original IPO in 1985.

Bosch, Starbucks, IKEA, Salesforce, Dell, Levi Strauss & Co, Virgin Atlantic.

Before setting up your investment strategy, you need to figure out which style will fit your goals. There are so many styles. 

When determining the proper investing strategy, you must some questions and find the answers. What is your investment limit? What returns are you trying to reach? How much risk are you able to tolerant?

Answering these questions will finally help in building your portfolio.

Portfolio chart


The analysis of your asset allocation depends on your risk tolerance. A traditional investor may prefer to hold 80% of his portfolio in fixed-income and 20% in stocks. The opposite would be suitable for an aggressive investor, a well-balanced investor will have a 50-50 allocation.

Quiz yourself about Socially Responsible Investing in the following quiz:

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