2020 was a year of stress and uncertainty, but it was also a year that brought to light issues of social justice, climate change, and social responsibility. As consumers, we have grown more conscious of what we eat, where we buy from, and, of course, who we vote for. But as investors, our awareness has gradually increased, as well.
More and more investors are opting to align their portfolio with their greater social beliefs and ideals. In fact, between 2016 and 2018 alone, assets placed in socially responsible investments rose 38%. Of the $46.6 trillion in assets under management, one in four dollars was in SRI assets.
What Is Socially Responsible Investing?
Socially responsible investing occurs when a person seeks to invest in companies that are ethically aligned with their views and able to generate financial returns. Just as one seeks out companies working to make a positive social or environmental impact, the selection process could also include identifying companies that may not be a good match — producing fossil fuels, manufacturing guns, and utilizing underpaid laborers, for example.
It’s important to note that the selection process for SRI assets is personal to you and your priorities. You may be focused on climate change and finding environmentally sustainable companies, while others may be more focused on supporting businesses owned by women. Aside from the usual investment metrics like past performance and cost, SRI requires additional screening done by you or your investment advisor.
While SRI stands for socially responsible investing, it can also abbreviate sustainable, responsible, and impact investing.
SRI vs. ESG vs. Impact Investments
In the realm of SRI, you’ve likely heard other terms like ESG and impact investments.
What Is ESG?
ESG stands for environmental, social, and governance investing. ESG investing falls under the broader umbrella of sustainable investing, and some consider it to fall under the umbrella of SRI as well.
In addition to more traditional metrics used to measure and select investments, ESG metrics feature non-financial indicators, which include “sustainable, ethical and corporate governance issues such as managing a company’s carbon footprint and ensuring there are systems in place to ensure accountability.”
While 2020 was a rollercoaster year for everyone, ESG-themed exchange-traded funds (ETFs) grew. In 2020 alone, ESG-themed ETFs brought in $38 billion in new investments, reaching a landmark $100 billion in total assets for the first time. That trend is expected to continue.
What Is Impact Investing?
While ESG refers more to the vetting process and labeling of investments, impact investing refers to the more tangible, measurable aspect of investments. Impact investing is seen more commonly in private markets, whereas SRI and ESG investing is shown more broadly in publicly traded vehicles.
Impact investing is done with the goal of creating measurable change — x units of carbon emission reduced, positive economic change in low-income neighborhoods, x schools built in a third-world country, etc.
Where you choose to spend your money, from day-to-day purchases to long-term investments, can be one of the greatest impacts you’ll make in your lifetime. If you’re considering diversifying your current portfolio with more socially responsible investments, it’s possible to do so without sacrificing your chance at gaining financial returns.
Work with your financial advisor to determine what companies may be well-aligned with your beliefs as you strive to address important social and environmental issues one dollar at a time.
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