26 September 2023

Sustainable returns: Why socially responsible investing keeps growing

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Jane Nowak* says many investors are finding better and more reliable ways to invest at the intersection of head and heart.

Photo: Annie Spratt

Responsible investing has come a long way over the last few years.

With the help of clearly focused investors, investment companies and non-profit steering groups, and recently buoyed up by measurable environmental, social and governance (ESG) risks and opportunities ratings published by Morningstar, many investors are finding better and more reliable ways to invest at the intersection of head and heart.

Current terminology used to describe responsible investing

With so many terms used to describe aspects of responsible investing, understanding their definitions can be overwhelming.

Just a few of the terms that I’ve seen used to describe investing to support a specific purpose are:

  • values-based investing
  • responsible investing
  • purpose-driven investing
  • socially responsible investing (SRI)
  • sustainable investing
  • green investing
  • community investing
  • impact investing.

The responsible investing lexicon — a work in progress

As the focus on responsible investing continues to grow, investment leaders and SRI non-profit leadership groups are defining and refining the many common buzzwords investors use to describe their brand of responsible investing.

It makes a lot of sense that definitions of investment terms surrounding responsible investing will differ.

When it comes to religious points of view, moral principles, environmental impact, a business’s governance practices, doing social good in the world or a combination of some or all of these things, responsible investing is a way to grow investments that mirrors each investor’s own values.

How to describe our responsible investment philosophies in a way that everyone understands is continuing to evolve.

But one thing is certain: no matter how we ultimately agree to describe responsible investing, more and more investors want their dollars “to grow the good” in their world and communities while growing their portfolios.

Three key terms for understanding responsible investing

Over the last several years, three key definitions have emerged to describe the current most common ways of investing responsibly.

Values-based investing/SRI (exclusionary):

A way to invest that typically supports a set of religious or moral convictions.

Investments for values-based investors are found by using negative screens that are used to exclude investments in specific companies and industries from consideration.

The most commonly used negative screens eliminate the stocks and bonds of companies associated with the sales or promotion of alcohol, gambling, tobacco, firearms, weaponry, nuclear power, abortion and adult entertainment.

Investments are ultimately chosen from the non-excluded universe of companies based upon a set of financial criteria.

Environmental, social and governance (ESG) investing (inclusionary):

ESG is investing by evaluating qualitative environmental, social and governance measurements and typical quantitative financial measures.

To determine the suitability of an investment for inclusion in a portfolio, both the quantitative and the qualitative data are considered.

This responsible investment style allows investors to include best-in-class companies from an investment sector (such as the energy sector), which might otherwise have been excluded from investment consideration.

Companies that only manufacture with recycled materials or those that produce a low carbon footprint may be featured as an ESG investment theme.

Companies ultimately chosen for investment reflect those businesses whose financial and social impacts can be measured and often include best-in-class companies across many economic sectors.

Impact Investing — focused social investing:

Often focused in their own communities or even at the annual stockholder meetings of publicly held companies, impact investors are looking to make measurable social impacts with their investment dollars.

Investing in green bonds, changing corporate environmental, social and governance policies, and providing affordable housing at a community level are each good examples of impact investing.

The importance of responsible investing to today’s investors

Clearly, no matter what it’s called, investing in a way that features social, environmental, governance and/or moral purpose continues to increase in popularity.

Responsible investing has truly risen to top-of-mind when individual investors choose their investment portfolios.

*Jane Nowak is a certified financial planner and member of the US Financial Planning Association.

This article first appeared at www.investopedia.com.

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