Socially responsible investing (SRI) has come to represent various investment strategies that favor companies with business practices generally viewed as socially responsible, ethical, and/or sustainable.
Overall, investor interest in SRI has been gaining momentum. In fact, the number of investment funds incorporating ESG (environmental, social, and governance) factors has increased 12% in the last two years alone, from 894 in 2014 to 1,002 in 2016. These 1,002 funds represent $2.6 trillion in net assets.
What is SRI?
Fundamentally, SRI is an investment strategy in which companies’ social and environmental records and objectives are factored in when building a portfolio.
Money managers who use SRI strategies often integrate ESG factors with traditional financial analysis to choose securities for their funds. The heightened focus on corporate sustainability issues allows investors to compare how businesses in the same industry have adapted to meet social and environmental challenges, and provides some insight into which companies may be exposed to risks or have a competitive advantage. For example, in some instances, poor decisions and lack of planning could cause negative financial results for a company, whereas good corporate citizenship may boost a company’s public image and help create value.
Why is SRI attractive to investors?
Individual investors may have different opinions about which policies and practices have a positive or negative impact on society. Fortunately, there are a number of SRI options to choose from. This gives investors the ability to build a portfolio that aligns with their personal values and offers the potential for earning positive returns.
In addition, investors may have difficulty measuring the intangible value associated with socially responsible companies, which means these companies may be undervalued and represent a potential buying opportunity.
What might investors find unappealing?
SRI opponents claim that investing should be about making money first; therefore, social and environmental issues are viewed as noble impediments to that goal. Focusing on SRI strategies limits the total universe of available investments and could make it more challenging to diversify and maintain your desired asset allocation. Diversification and asset allocation are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss.
Moreover, although data is available, it can be difficult to thoroughly assess the ethics of a given company. For example, beyond the value chains of a company itself, investors might also need to look at the different social standards among the contractors and subcontractors associated with the company.
Remember that different SRI funds may focus on very different ESG criteria, and there is no guarantee that an SRI fund will achieve its objectives.
All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful. The return and principal value of SRI stocks and mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
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