Socially Responsible Investing

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1 Socially Responsible Investing June, 2018

2 Socially Responsible Investing Socially responsible investing (SRI) is an investment process that considers social and environmental factors, both positive and negative, within the context of securities and investment analysis. In this article, we've compiled a series of articles from Investopedia to help you learn more about this area of investing that is garnering more and more attention. Socially Responsible Investing (SRI) Common themes for socially responsible investments include avoiding investment in companies that produce or sell addictive substances (like alcohol, gambling and tobacco) and seeking out companies engaged in social justice, environmental sustainability and alternative energy/clean technology efforts. Socially responsible investments can be made in individual companies or through a socially conscious mutual fund or exchange-traded fund (ETF). There are two inherent goals of socially responsible investing: social impact and financial gain. The two do not necessarily go hand in hand; just because an investment touts itself as socially responsible doesn't mean that it will provide investors with a good return. An investor must still assess the financial outlook of the investment. History of Socially Responsible Investing Socially responsible investments tend to mimic the political and social climate of the time. In the 1960s, investors were mainly concerned with contributing to causes such as women's rights, civil rights and the anti-war movement. For example, Martin Luther King, Jr. played a large role in raising awareness for the civil rights movement by targeting companies that opposed the cause as socially irresponsible. As awareness has grown in recent years over global warming and climate change, socially responsible investing has trended toward companies that positively impact the environment by reducing emissions or investing in sustainable or clean energy sources. Consequently, these investments avoid industries such as coal mining due to the negative environmental impact of their business practices. Whether it be buying shares of firms peddling clean technology or seeking out nonprofits that aim to make an impact on a certain community there are many different subsets, sectors and ways in which to do it.

3 Impact Investing Impact investing aims to generate specific beneficial social or environmental effects in addition to financial gain. Impact investing is a subset of socially responsible investing. However, the primary difference is that while socially responsible investing encompasses avoidance of harm, impact investing actively seeks to make a positive impact. While socially responsible investing focuses on public companies not harming the world, it still emphasizes return. With impact investing, the primary goal is societal good. Impact investing considers a company s corporate social responsibility before investing in that company. Examples of a company s sense of duty to positively serve society include investing in sustainable energy practices, financing startup businesses (often run by women) or helping the less fortunate in their community. While SRI is focused on public companies, impact investments can be made in either public or private companies. Although the bulk of this type of investing is institutional, a range of investor platforms and networks are beginning to emerge, and the number of organizations offering these products is increasing. One such organization is ImpactAssets, which offers donor-advised funds and impact investing notes to individuals and advisors looking to produce positive social and environmental change. Each year, the organization publishes a list of 50 investment managers who specialize in impact investing techniques called the IA50. Impact investing appeals largely to younger generations who want to give back to society, so this trend is likely to expand as these investors gain more influence in the market. By impact investing, individuals or entities essentially state that they support the message and the mission of the company in which they're investing, and they have a stake in the company's welfare. Green Investing Often conflated with socially responsible investing, green investments are essentially investment activities that focus on companies or projects that are committed to the conservation of natural resources, the production and discovery of alternative energy sources, the implementation of clean air and water projects, and/or other environmentally conscious business practices. When people talk about "green investments" they're speaking generally of investing in activities that, in a popular context, can be considered good for the environment in a direct or indirect manner. Investing in "green" companies can be riskier than other equity strategies, as many companies in this arena are in the development stage, with low revenues and high earnings valuations. However, if investors find protecting the environment by encouraging eco-friendly businesses to be important to them, green investing can be an attractive way to put their money to work.

4 Skewed to Wealthier Investors For Now More and more opportunities will continue to open up for investors seeking to align their own financial futures with their desire to make a difference in the world. For now, though, most scalable impact investing options are still geared to wealthier investors. For those investors with less than $3 million to invest, sustainable and responsible investment vehicles, such as mutual funds focused on socially and environmentally responsible investments, are still the way to go. Private deals that require a fair amount of due diligence may still be too risky for the average investor. Investor considerations Socially responsible investing seeks to maximize welfare while earning a return on one s investment that is consistent with the investor s goals. On the surface, these two notions may appear contradictory. For example, there may be an implicit cost of such an approach to the extent that it eschews profitable companies and sectors. Tobacco, alcohol, firearms and gambling have been lucrative industries. As with any investment approach, the socially conscious investor needs to define their risk and return objectives along with their socially conscious constraints. Social investing has implicit costs, i.e., the opportunity cost of returns of excluded companies with unacceptable products or business practices. Diversification is always an important consideration. Additionally, SRI can present a dilemma. Depending on an investor s perspective, companies may display characteristics that are both irresponsible and responsible. For example, consider an investor who is opposed to investments in the energy industry. Since all products need to be shipped to their point of sale, which requires fuel, all businesses are affected. Situations like this illustrates how these types of considerations make the precise definition even more crucial. The Bottom Line Socially responsible investment reflects an investor s values. While the opportunities in this realm of investment management have grown considerably, one may not ignore best practices of investing. The investor must clearly define their goals when undertaking this sort of approach, recognizing its potential tradeoffs and clearly articulating a policy that considers all the variables when looking to maximize the good over the plentiful and abundant The desire to meld investments and social responsibility is growing at a fast pace among the rich and not-so-rich. And the groundwork has been laid for the creation of numerous products to meet the demand of a new generation of socially

5 conscious investors. As long as such investments produce competitive returns both financial and social their popularity will only grow. Additionally, SRI can present a dilemma. Depending on an investor s perspective, companies may display characteristics that are both irresponsible and responsible. For example, consider an investor who is opposed to investments in the energy industry. Since all products need to be shipped to their point of sale, which requires fuel, all businesses are affected. Situations like this illustrates how these types of considerations make the precise definition even more crucial. IMPORTANT DISCLOSURES The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. For a copy of our latest Form ADV Part II and/or Privacy Policy, please contact us at (484) or to us click here.