Why Is Socially Responsible Investing Important


What Are Ris Benefits

Why is Socially Responsible Investment Important?
  • It improves risk management: Responsible investing can reduce exposure to risks that may not be visible on a companys financial statements. Thats because a company is more than just its numbers. While it can be tricky to analyze a companys RI performance, when you read beyond the numbers to see if its activities align with your values, you can get a more holistic picture than just looking at its financial metrics. That kind of analysis also provides you with a view of how its managed, how it acts, and what its long-term prospects are for success.
  • It enhances long-term financial performance: This kind of impact investment can also lead to better long-term financial performance. In addition to showing that the company may have superior risk characteristics, a Carleton University study also found that RI equity mutual funds in Canada financially outperformed their respective benchmarks 63% of the time. That study also showed that RI fixed income and balanced mutual funds outperformed their respective benchmarks 67% of the time, and recent reports from the U.S. have shown similar results. They noted that responsible equity mutual funds met, or exceeded, the median return of traditional equity funds 65% of the time and RI funds also had equal, or lower, median volatility about two-thirds of the time.
  • Research Approach And Case Study Selection

    This paper is exploratory in nature and aims at contributing to the call for further research on the implications of SRI for the transition toward sustainable development. Therefore, a qualitative method, based on the analysis of multiple case study was performed for gaining insights about the topic under investigation. The implemented method is particularly fitting for understanding emerging phenomena when how and why questions are being posed when the investigator has little control over events, and when the focus is on a contemporary phenomenon within some real-life context, especially when the boundaries between phenomenon and context are not clearly evident . To this end, a content analysis was conducted on the KIIDs that the case companies published for 2020.

    The overall quality of the analysis was ensured through the construct validity, achieved establishing suitable operational measures for the analyzed concepts and the internal validity achieved basing the content analysis on well-established items and indicators . Items and indicators have been developed drawing on previous research , while the internal validity of the analysis was boosted triangulating several different sources of data apart from the KIIDs, such as corporate posts on the website and social media, reports, brochures, online news, etc. or asking some key informants where possible.

    Why Being Socially Responsible Is More Important Than Ever

    Submitted by Jacob Shriar

    Your company needs to be socially responsible because people are starting to value socially responsible companies more than ever.

    As companies try harder to appeal to millennials, they need to think about becoming more socially responsible, as that is very important to them.

    Besides all of the benefits that being socially responsible brings, its the right thing to do.

    As consumers, were becoming more aware of whats going on in the world around us, due to the power of the internet and social media.

    As we find out the damage that many companies are doing, theyre becoming increasingly angry and more demanding that companies make an effort to show that they care.

    The concept of core values and purpose for your brand is becoming more important, so being able to embody that purpose through social responsibility will be a key differentiator for companies in the future.

    The Research For Being Socially Responsible

    Lets look at a few interesting pieces of research that proves how important corporate social responsibility is.

    When thinking about how to appeal to millennials, think about this: they will spend more than $200 billion annually starting in 2017, and $10 trillion in their lifetimes.

    Consider these statistics from a study done about millennials and social responsibility:

    â 1 out of 3 millennials boycott or support businesses based on the causes that matter to them.

    â 55% better morale

    â 43% more efficient businesses processes

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    Youll Sleep Better At Night

    If you havent picked up on this theme by now, Ill say it for you. By investing in a socially responsible way, and assuming that it aligns with your values and youre completely committed, youll sleep better at night knowing that youre trying to do good in the world. Although none of us are perfect, most people genuinely want to do some good in the world. If you can invest your money in socially responsible companies, and make a profit doing so, youll have two things to feel good aboutmaking money and using your money to improve the human condition.

    The most rewarding feeling when you take an SRI strategy is when the companies you invest in begin to make a profit and reward you financially. Not only does it show that youre aligned with the values of the companies youve invested in, but it also shows theyre profitably doing good. Its a win-win, and quite rewarding.

    You also dont have to feel wrong about paying a little more for these investments as one study shows that 66% of people around the globe are willing to pay more for sustainable goods. That number jumps to 73% with millennials. Its always smart to focus on performance, but if youre doing your research appropriately, you should rest easy knowing that youre investing in a higher cause.

    Customers Love Socially Responsible Companies

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    A survey conducted by Nielsen group, found that 50% of consumers, surveyed worldwide, would be willing to pay more for goods and services from socially responsible companies.

    The one caveat, and this is important for companies to remember, is that in countries where there was already some skepticism, the willingness to spend more was lower. What this means, is that companies and the programs youre implementing need to be really authentic.

    In their 2016 book, Good Is The New Cool, Afdhel Aziz and Bobby Jones highlight the importance of authenticity, inclusiveness, kindness in everything from company culture to marketing campaigns.

    They want to contribute to something that makes a difference and has a positive impact on the world.

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    Ethical Investing In Canada

    Although the first Canadian fund for ethical investing was created in the mid-80s, it wasnt until the mid-2010s that interest in this type of investing exploded in the country. Just as interest in socially responsible investing has grown in the United States, many managers have launched ethical investing products. All of the big five national banks have introduced SRI-related mutual funds or managed accounts. Research by Schroders suggests that 80 percent of Canadians are aware of ethical investing . And unsurprisingly millennial Canadians have considerably more interest in it than Gen X or the baby boomers. Assets managed under SRI guidance have jumped by hundreds of billions of dollars in the last decade.

    Heres All You Need To Know About Socially Responsible Investing

    Abigail Adams, the second First Lady of the United States of America, once quoted, To be good, and do good, is the whole duty of man comprised in a few words.

    What if there was a way to grow your money and do something good for the world at the same time? This idea is the whole essence of socially responsible investing. It basically means to invest in industries that work and endorse principles of social justice, environmental sustainability, legal and ethical practices, clean energy, etc. With socially responsible investing, instead of putting your money in industries like alcohol, gambling, tobacco, weapons, etc., that directly or indirectly harm the world and the environment, you invest in industries that work towards making the world a better place.

    In one of our articles on Goals-based investing, we have explained details about investing. However, this should not be mistaken as charity. In fact, the two main objectives of socially responsible investing are: Positive social impact, coupled with good economic returns.

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    Gives Investors An Opportunity To Reward Ethical Companies

    Your investment might seem like a drop in the ocean, but cumulatively, it can go a long way in changing the world. For instance, the more investors invest in an ethical company, the stronger it grows and the more initiatives it takes to handle contentious issues.

    On the other hand, investing in socially responsible companies means that you are foregoing companies that you consider unethical. The more people who do this, the more capital-deprived such companies will be. In the long run, more companies will join the sustainable route creating a bigger impact on the planet.

    A practical example of such a scenario is the termination of the Shell Oil and Lego companies partnership some years back. Lego ended their contract with Shell Oil, aiming to become more environmentally friendly in what they do.

    Now, they have partnered with socially responsible companies such as World Wildlife Foundation to promote conservation and other social initiatives. Lego is also committed to achieving 100% renewable energy production capacity in its effort to reduce its carbon footprint.

    If investors dont invest in companies like Lego, their efforts towards promoting a cleaner future wouldnt be possible.

    Comparing Stock Market Index Performance

    What Is Socially Responsible Investing

    Considering that difference in performance of funds may be due to portfolio selection/construction process and/or the ability of fund managers and not necessarily on the nature of investments themselves, some studies have compared the performance of stock market indices instead. Two of the pioneer studies compared the performance of the Domini 400 Social Index with the S& P 500. The Sharpe ratio and the capital asset pricing model were used to estimate Jensen’s alpha for the comparison and no significant difference was found in the performance of the two indices. A follow-up study compared the performance of four SRI indices with the S& P 500 index between 1990 and 2004 and found that returns on the SRI indices exceeded returns on S& P 500 even though they were not statistically significant. Others focused only on the US and on outside the US by studying the performance of 29 SRI indices globally. Using the capital asset pricing model to estimate Jensen’s alpha as the performance indicator, no significant evidence of under/over performance was found. A comparison of the performance of SR indices with conventional indices on a global scale using found there is “strong evidence that there is a financial price to be paid for socially responsible investing.”

    A more recent study showed that “improvements in CSR reputation enhance profits”.

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    Environment Social And Governance Funds

    The next class is Environment, Social, and Governance funds . Where socially responsible investing funds tend to focus on excluding industries that dont use ethical practices or products, ERG funds concentrate on including ones that do. Theres a big difference here. Because a fund excludes a company that produces a product like tobacco, it doesnt mean there arent some unethical practices in the companies that are included in the fundit tows the line in some cases. So ERG funds focus on companies that do function in entirely ethical ways.

    Ethics Might Become More Important Than Performance

    Youve probably considered this point by now. When you limit your investment options and potentially pay more to invest in companies that practice social and ethical responsibility, you may give up on your return on investment. Lets not forget the reason were investing in the first placeobtaining the highest return on investment possible. When socially responsible investing becomes the primary objective, the financial side of the equation will likely sufferat least part of the time.

    For example, one financial advisor writing for Seeking Alpha pulled some data and showed that on a 3, 5, and 10-year comparison basis, funds that were considered socially responsible underperformed standard indices. Marketwatch columnist Vitaly Katsenelson also wrote an in-depth opinion piece on why socially responsible investing can be a money pit.

    Now, there is some data to validate this claim, but some of it is opinion. My advice is to do your research and find stocks that align with your values, but also dont go outside of your guidelines for picking any other stock. For example, if you take a value investing approach and only want stocks that pay a dividend and dont carry debt, dont break that rule just because a company considers itself to operate ethically.

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    Examples Of Socially Responsible Companies

    There are lot of companies that are socially responsible, and one of my favourite examples of this is an organization called 1% for the planet.

    What they do is connect businesses with non-profits, and have a huge directory of companies that donate 1% of their profits to charity.

    Here are some well-known examples of companies that are very socially responsible.

    Why This Topic Is Important To Me

    The Importance of Corporate Social Responsibility for ...

    At the start of the Fall semester of 2018, I went to a certain event hosted by NUImpact: Northeasterns Impact Investing Fund and Initiative. I had heard about the term impact investingbut had no idea what it meant. I went because my friend Shivank Taksali was moderating the event and little did I know this world of sustainable investing would come to mean so much more to me as I progressed through college by joining this organization and eventually leading it.

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    Allows You To Invest In What You Believe In

    Some people want to make a difference in this world but dont know how to. Socially responsible investing is one way to make something count. Instead of just talking about climate change or how alcohol is ruining families and the young generation, you can now do something about it.

    Also, for many investors, personal values are quite important. If an issue is bothering you, lets say gender violence, racism, or deforestation, you can invest in companies or funds whose portfolios tackle such issues.

    For instance, investing in companies that promote gender equality and sustainable living is a great fit.

    You cant advocate for a clean, emission-free environment while you still invest in companies that destroy forests or use too much fossil fuels.

    How To Become A Socially Responsible Investor

    If youre trying to be a socially responsible investor, you should be going out of your way to buy funds that meet that criteria.

    The simplest way of doing that is with a robo advisor, which will manage and invest your money for you based upon your own individual risk tolerance. Some of my favorite robo advisors have socially responsible investing tracks, including Personal Capital, which focuses on ESG metrics, and Betterment, which also offers SRI alternatives for large cap U.S. stocks and emerging market stocks.

    Ally Invest now has what they call Robo Portfolioswhich is their version of a robo-advisor. They now feature a socially responsible portfolio option that, according to Ally Invest, is shaped by companies with ethical track records, and youll only invest in businesses that actively practice sustainability, energy efficiency or other environmentally-friendly initiatives.

    Ally Invest has NO advisory fee, either, which makes it a huge bargain. You can open an account with as little as $100 and youll also get call, chat, or email support at no additional cost. Make sure you read our complete review on Ally Invest for more details on their Robo Portfolios.

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    How You Can Start Building Your Own Investment Portfolio

    Before you start investing, it’s crucial you define what your reasons are for investing in the first place and what your goals are. Then, look at what resources you have available. Do you have an employer-sponsored plan like a 401? Or do you want to open an IRA or taxable brokerage account?

    You’ll also want to consider how much time and effort you want to put into making sure all your investments fall within the realm of ESG or socially responsible investing. If you want to be more hands off, consider investing in socially responsible ETFs, available with a few brokerages like Charles Schwab and Betterment. Seeking out an advisor who specializes in ESG or socially responsible investing is another great option.

    For those who are willing to commit more time researching, Holloway suggests looking at a fund’s management team , the company’s track record and the goals of the companies within the fund. For example, will you be helping to finance renewable energy sources? Or helping those in marginalized communities?

    Don’t forget to look at the fees see whether you’re willing to pay a higher expense ratio or management fee. If so, you can consider balancing it out with a fund with lower fees to ensure you’re keeping most of your investment dollars.

    It is possible to achieve strong financial returns while sticking to your values. It may take some work to build a socially responsible portfolio, but the effort is worth it.

    Editorial Note:

    Socially Responsible Investing : Why It Matters

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    by Divya Premkumar | Sep 14, 2020 | Beginner’s guide, Investment Basics |

    Introduction to Socially Responsible Investing : Deciding how you want to invest your money is often hard. You need to take many factors into consideration such as risk, returns, taxes, and inflation. It takes a lot of forethought and groundwork to figure out a way to get the best return on your investments.

    Yet, there are some investors who choose to invest in companies that are not only financially stable but also make a positive impact on the environment. Here, we are talking about Sustainable or ethical investors, who in the investing world are also known as Socially responsible investors.

    Today, we are going to discuss what is Socially responsible investing or SRI, why it is important, and finally, how to become a Socially Responsible investor. Lets get started.

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