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We end up with a very subjective definition when we dive deep into the real meaning of ethics. So in a broad and general outlook, you can think of ethics as the primary code of conduct acceptable by your society. It is more or less like a system of moral principles related to human conduct.
So what does that have to do with investments? If you are new to the world of investments, you might not be aware of Socially Responsible Investing. So in this article, we will explain in brief what SRI is all about and how you can start.
What Is Ethical Investing?
As it is clear from the name itself, ethical investing has everything to do with practicing a form of investment strategy where you use your moral compass and principles to guide your investment plans.
This is a highly subjective form of investing wherein what is ethical for one investor might not be for another. Still, as long as it fits the ethical criteria of the investors and their societies, it hardly matters if it brings personalized results.
What Does It Mean To Invest Ethically?
To put it simple text, ethical investing is all about the investor deciding to invest in a business that adheres to specific policies that are consistent with the investor’s personal views. These opinions could have religious, political, or environmental roots.
For instance, an investor who is a firm believer in the Bible would consider companies that deal in immoral goods like alcohol or cigarettes to be sin stocks. On the other hand, an investor who wants to protect the environment would be willing to put money into any business claiming it follows green practices.
The issue with these kinds of investments is that the investors deem these businesses as restricted companies because they do not adhere to their personal beliefs. But they fail to consider that they might lose out on prospective gold mines because these businesses might make them a lot of money.
In other words, ethical investing does not guarantee any profits or returns.
So how can you both be ethical as well as a successful investors?
The answer is simple- Socially Responsible Investing.
What Is Socially Responsible Investing (SRI)?
Socially Responsible Investing is an investment strategy aimed at allowing the investor to make a profit while simultaneously positively impacting society with the investments. You can also call it a socially conscious investment. For example, an investor can decide to put their money in a company that supports environmental sustainability while excluding companies that produce a negative impact, like gambling or alcohol.
SRI practices also involve using the ESG framework, which can be understood as considering the Environmental, Social, and Good Governance factors when investing. As the name suggests, supporters of the ESG framework invest in companies and businesses that base their focus on protecting human rights, sustaining the environment, and, most of all, customer satisfaction.
Investors who take up this form of investing have exclusion criteria that come into play whenever they choose which companies to invest in. This list involves all the companies that produce or sell anything that is socially deemed unacceptable or unethical such as producing fossil fuels and firearms.
Does It Work?
It is a common question whether people who do good ever win the war, and to answer that in the case of socially responsible investments is a big YES! Regardless of widespread skepticism about the economic strength of socially responsible investments, many studies have demonstrated their positive impacts.
A study conducted in 2020 discovered that 80% of the data that they collected for the research showed a positive impact on the investment performance of SRIs. Many more studies have also shown that investing in SRI mutual funds matches the performance of conventional investments and may even exceed them sometimes.
Types Of SRIs You Can Invest In
- Community investments: For benefiting the communities directly through CDFIs (Community Development Financial Institutions)
- Investing in Exchange-Traded Funds and mutual funds which are SRI-focused
- Microfinancing startups by offering microloans to small business owners.
Implementing an SRI strategy into your investment plan is not that different from traditional investments. If anything, SRIs are becoming more popular nowadays, with more investors making more socially conscious choices when it comes to their investments.
Above all this, you are also supporting a cause that will positively impact society at large rather than just investing blindly in any company without looking at the ethics of business.
Why should I consider SRI?
SRI aligns your investments with your values and beliefs, promotes sustainable business practices, and can help you avoid companies with controversial or unethical practices.
How do I invest in SRI?
There are several ways to invest in SRI, including mutual funds, exchange-traded funds (ETFs), and individual stocks that meet certain social and environmental criteria.
What are the risks of SRI?
SRI can be more subjective and may involve higher fees than traditional investments. There is also the risk of underperformance if the social and environmental factors negatively impact the financial performance of the investments.