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04.05.06
Primer On Socially Responsible Investing
 By
Thomas Lau
Socially responsible investing (SRI), or sometimes known as ethical investment, is an investment strategy combining financial with social, environmental or other ethical criteria that satisfy both the financial goals and personal values of the investor.
Therefore, a socially responsible investment strategy is essentially one that strives to maximize the after-tax return of investments given the constraints of ethical factors.
How Did SRI Come About?
The historical beginnings of SRI were mostly religious: churches discouraged their members from investing in "immoral" businesses such as breweries, tobacco companies and gambling establishments ("the sin industries"). While these traditional forms of SRI still thrive, the whole notion of SRI has taken on a new meaning in the past 30 years to become an umbrella term for any investment strategy that takes into account the nature of the business being invested in, in addition to profitability. This can mean either the avoidance of certain types of industry that are deemed objectionable, or alternatively, the channeling of funds into companies that are perceived to be desirable.
The rise of the SRI is closely related to the increasing awareness of environmental and social issues around the world and the advent of modern communication technologies that have allowed new information and alternative views to be propagated widely and efficiently. Broadly speaking, SRI can be broadly grouped into four different categories: screening, shareholder advocacy, community investment, and investment integration (Graph 1). Screening, the original form of SRI, remains the most popular, but all forms of SRI has seen significant growth in the past decade (Graph 2).
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a. The Screening Model
This is the most traditional form of SRI where entities to be invested in are chosen by applying social, environment or ethical criteria. This process can either be "negative", with entities deemed unsuitable or whose activities are considered undesirable being excluded, or "positive", i.e. funds are directly towards specific, "desirable" businesses in the asset-selection process. Originally, negative screening is the norm, but positive screening has been gaining popularity. According to the Social Investment Forum (SIF) in the US, the most popular used screens are tobacco, alcohol, gambling, defense/weapons and community relations. Socially-screened mutual funds catering for a variety of investment styles are also available: large-cap, international, Catholic, Protestant, Islamic, as well as single-issue funds dedicating to environment, labor, employment equality issues, etc. From 1995 to 2005, environmentally and socially screened mutual funds in the US alone experienced a 940% increase in total assets from US$162 billion to US$1,685 billion (Graph 3).
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to read the full article.
About the Author:
Thomas Lau holds a master's degree in development economics
from Dalhousie University in Halifax and comes from a family
who has been involved in the financial industry for three generations. |
