Socially responsible investing is a strategy that allows an investor to maximize financial returns, while doing social good. Also known as sustainable or ethical investing, the concept usually relates to the actions of corporate practices, environmental protection and consumer rights.
What is Socially Responsible Investing?
The market for socially responsible investing in both the U.S. and Europe is a multi-trillion dollar industry. As of 2007, portfolios that are screened for socially responsible investments in the U.S. were worth $2.71 trillion. This is 11 percent of the total value of investments under professional management in the United States. According to a report issued by the Social Investment Forum, it estimated that assets in these portfolios increased by 18 percent over the course of the two previous years. This is compared to a normally-managed investment that increased on average only three percent.
Above: Wind turbine. (Supplied by Neutronic; Public Domain; http://upload.wikimedia.org/wikipedia/commons/7/72/Turbine_aalborg.jpg)
Types of Investments
There are two major ways in which an individual can balance the social good with maximizing strong financial returns. The most basic premise involved with socially responsible investing is to perform proper screening techniques before investing. This process basically allows the investor to not make a financial investment into a company that doesn't share his or her values. Another action an investor can take is to divest from companies based on personal ethics or objections to business practices. An example of this technique would be refraining from or removing an investment into a tobacco company if the investor does not support smoking.
Many people also believe that by remaining active as a shareholder, management of the company can be steered in the direction the investor prefers. This includes voting on proxy resolutions and initiating conversations with management about issues important to the investor.
Investors can also create change by investing directly into community institutions. By putting money into the hands of community development organizations, one can push to adjust social issues. These investments commonly have to do with the alleviation of poverty or the support for green initiatives.
Above left: No smoking. (Supplied by AIGA; Public Domain; http://upload.wikimedia.org/wikipedia/commons/6/6b/No_Smoking.svg)
Historical Example of Socially Responsible Investments
The modern idea of socially responsible investing came from the period of the Vietnam War. Many investors began to understand how their support for certain businesses went against their personal goals and beliefs. One major example of this changing paradigm occurred in 1972. The American public was privy to a video of a naked Vietnamese girl, Phan Thi Kim Phuc, running down a road with a napalm burn on her back. Many investors grew concerned with Dow Chemical's participation in manufacturing napalm for the war. Over the course of the next year, a combination of protests, boycotts and divestment heavily damaged the company. At the time, Dow's stock holders dropped from 95,000 to 90,000.