What is socially responsible investing?
Socially responsible investing, sometimes known as ethical investing, is the application of your personal values and societal concerns to your investment decisions. It considers your financial needs as well as the selection and management of investments based on your personal ethical, moral, social or environmental concerns.
There are three basic approaches to socially responsible investing which have evolved over the years:
1. Screening – the application of guidelines or “screens” to the investment process. These screens can be positive and inclusive, or negative and exclusive.
2. Community Investment – the investment of money that contributes to the growth and well-being of particular communities.
3. Shareholder Advocacy – the process of using shareholder influence to help bring about positive change at corporations.
How does it work?
You, as an investor, can select investments managed by professionals employing social screening, or can choose your investments based on your own screening criteria and research.
By selecting those investments employing positive social or environmental guidelines, you’re able to educate yourself on companies and issues. A significant portion of the investing public in Canada already employs this strategy, with socially responsible investing now accounting for close to $6 billion.
There are an almost infinite number of issues that you can use to select investments for your own portfolio. Here’s a list of some of the most common criteria used to screen fund companies:
- Charitable contributions – how much and what kinds of charities do they contribute to?
- Community involvement – do they support local programs that benefit their community?
- Corruption – do they work with governments that operate in corrupt ways?
- Ecology and environment – do they follow sustainable development practices?
- International human rights – do they conduct business in countries that respect human rights?
- Labor relations – do they treat their employees well? Do their contractors use sweatshops or employ child labour?
- Military weapons – are they a major military contractor?
- Nuclear power – do they generate nuclear power or contribute to the industry?
- Product safety and quality – do they produce safe, reliable products?
- Women’s issues – do they have a good record for treating their female employees and women in general fairly?
Can you reconcile your social conscience with your financial goals?
In Canada, Michael Jantzi Research Associates has created the Jantzi Social Index (JSI), an index of 60 Canadian companies selected on social responsibility criteria. The index was launched in February 2000, and therefore does not have a long-term track record.
However, according to the Social Investment Organization (SIO), the index was backdated using historical data to determine if it was able to outperform indices of conventional Canadian stocks. This data shows that the value of the JSI stocks increased by 18.9% during the last five years, while the TSE 100 grew by 18.1% and the TSE 300 rose by 17.4%.
The cause of such outperformance is a matter of debate. Some researchers believe that it’s due to the fact that socially responsible companies usually reside in stable sectors and in successful industries. Others believe that there’s a social premium that leads to higher returns because of far-sighted management, higher productivity and lower legal and social liabilities.
What is clear is that, contrary to conventional wisdom, investing according to social and environmental screening does not necessarily lead to lower returns. In fact, in some cases, social screening can produce substantially higher returns.
The choice is yours
Socially responsible investing examines the extent to which your morals and concerns determine your investment decisions. The bottom line is that you can make a difference while building a secure financial future. How you do that is up to you.
