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Most investment vehicles and strategies have one goal: to maximize returns. They don’t care if the companies are doing good, benefiting the environment or being healthy for the world.
But while investing in a company that does “good” isn’t crucial for everyone, many investors prefer to support socially and environmentally responsible organizations. Others choose to steer their money away from companies they feel are hurting the environment or workers.
If you’re worried about where your money is going, there’s an investment category that lets you invest in your values without worrying about whether the businesses you support are hurting people or the planet. It’s called ethical investing. And over time, it’s specialized enough that there are now three different types of ethical investing:
- Environmental, social and governance (ESG)
- Socially Responsible Investment (SRI)
- Impact investment
Each style of ethical investing has its own principles and rules and may appeal to a specific type of individual. So, if you’re interested in making money from your investments while doing good, read on to find out if ESG, SRI, or impact investing is right for you.
The short version
- Ethical investing is not a new subset of investing, but it is more available to the average retail investor than ever before.
- ESG investment rating companies based on their environmental, social and governance practices
- SRI excludes companies that do not meet a person’s ethical or religious convictions, and it is very personal.
- Impact investing focuses on companies that directly do social good, with the hope of high returns
Origins of ethical investment
The practice of ethical investing dates back to the early 20th century when the Methodist Church in North America decided to change its view of the stock market (until then considered gambling) and use it to grow the his wealth
But the Church had strict rules about which companies they would invest in, banning companies that supported, produced or profited from alcohol or gambling. The Quakers adopted this unique portfolio and added gunmaking to the list.
The first ethical mutual fund was launched in the US in 1971. The Pax Fund was a direct response to the Vietnam War and excluded companies that profited from what they saw as a morally questionable insurgency. Companies such as Dow and Monsanto, makers of Agent Orange, a defoliant sprayed on Vietnamese jungles that caused birth defects, were excluded from the fund.
For the past century, ethical investing had been mostly reserved for religious or cultural groups with enough capital to guarantee the management of their own fund. However, the rise of retail investing over the past 20 years now means that anyone can access ethical investment portfolios.
During this time, ethical investing as an investment category has specialized. Today, you can choose from different funds that adhere to ESG environmental, social and governance criteria, socially responsible investing or impact investing.
It all depends on what kind of impact you want your money to have.
Comparing Ethical Investment Strategies: ESG vs. SRI vs. Impact Investing
|Impact investment||Invest based on maximum positive impact||
🌱Socially Responsible Investment (SRI)
Socially responsible investing is the most traditional type of values-based investing and is what the Methodist Church was all about all those years ago. SRI seeks to avoid companies that do not meet the moral, ethical and religious convictions of the investor. An example of SRI is an investor who is against the consumption of meat, who refuses to invest in Cargill, a multinational livestock company.
The result of SRI is that you put social awareness above returns, so you may not earn as much from your SRI portfolio as you would a non-SRI portfolio. But for most investors making this decision, ethics are more important than returns.
You have several options if you want to switch your investment strategy to SRI. First, you can choose to invest in an SRI fund. An SRI fund is the simplest method, but it has the disadvantage of not allowing you to choose based on your unique convictions. Instead, you should invest in companies that a third-party fund manager has deemed ISR appropriate.
An example of such a fund is the 1919 Socially Responsible Balanced Fund (SSIAX). This fund is one of the oldest SRI funds, established in 1992. It has $700 million in assets under management and includes 30% grade bonds of low-risk investment and 70% stocks that do business in a “socially responsible way”.
Another option is to use a robo-advisor. Some robo-advisors, like improveoffer SRI portfolios for users who want everything about their investments to be socially conscious.
Finally, let’s say you prefer to build a portfolio yourself that is 100% in line with your convictions, you can use an SRI monitor like this one offered by Fidelity, which allows you to examine both ETFs and individual stocks to see how socially responsible they are. .
Find the best Robo Advisor for you>> Leading Robo Advisors for Socially Responsible Investing
🌱Environmental, social and governance (ESG) investment.
ESG investment stands for environmental, social and governance and represents a group of criteria through which companies must be selected to qualify. It was first popularized in 2005. The idea behind ESG investing is that financial managers and investors should look beyond pure profitability and consider environmental, social and governance factors when deciding whether or not to invest in a company. Some areas of focus for the ESG criteria include:
- Greenhouse gas emissions
- Water use, waste and pollution
- Land use
- Labor diversity
- Security management
- Involvement with local communities
- Composition of the board
- Code and values
- Political contributions
- Reporting protocols
ESG is different from SRI investing. The ESG does not necessarily exclude companies that are associated with adverse outcomes, but it misclassifies them based on those outcomes. S&P Global uses the factors listed above to conduct its ESG assessments and rate companies. ESG has grown substantially. In 2018, the level of ESG investments was $31 trillion, a 34% increase over 2016 figures.
An example of an ESG fund includes the Vanguard FTSE Social Index Fund (VFTAX, which tracks the FTSE4Good US index).
- This index excludes companies that market “vice” products such as adult entertainment, alcohol, gambling and tobacco.
- It also excludes non-renewable energy companies that deal in nuclear power, oil and gas, and weapons manufacturers.
- Finally, it excludes companies with controversial behaviors and diversity practices.
So what’s in the Vanguard FTSE Social Index Fund? You will find companies like:
- Apple Inc
- Microsoft Corp
- Amazon.com Inc
- Alphabet Inc Class A (parent company of Google)
Although some of these companies may not fit everyoneThe idea of guilt-free investing, they do adhere to criteria while balancing returns.
Related>> How to know if a company or fund is really ESG
🌱 Impact investment
ESG investment is a criterion for evaluating investments. SRI allows you to invest according to your convictions. These investment styles aim to exclude companies that are not up to par. Impact investing, on the other hand, aims to include companies whose explicit mandate is to have a positive impact on society.
This type of investment has grown in popularity over the past decade, but there is still some risk in choosing this investment strategy. Impact investors typically choose companies that follow market trends and may be newer and less established, such as solar panel companies or electric car start-ups. This choice could lead to higher returns than the market average, or it could lead to significant losses.
To get into impact investing, you’ll need to put on your research hat. Unlike SRI and ESG, there are no widely available funds in this space. Instead, you should look for opportunities to invest in and support these companies directly.
Here are some popular ways to get started with impact investing:
- Buying shares in a company that seeks to make a significant and positive impact on the world (such as an electric car company or a solar company)
- Offer small loans directly to small businesses that aim to make a significant impact in their local community
- Establish private funding to fund resources in low-income communities, such as affordable housing groups or health food retailers
Remember, impact investing is investing. It is not a charity, so you should always expect to receive a good return.
Ready to start?>> What is impact investing? Definition, where to find investments
How to decide between ESG, SRI and impact investing
There is some overlap between ESG, SRI and impact investing, so let’s go over the definitions again:
- SRI: Eliminate companies that do not meet the ethical or religious convictions of the investor
- ESG: Evaluate companies based on more than their financial performance, prioritize those that also do good
- Impact investment: Search for companies that have a significant positive social or environmental impact
Which strategy you choose depends on what you want to achieve with your dollars. For example, if you want to invest normally, but prefer to focus on companies that do good as well as earn good returns, then ESG is right for you.
If the most critical aspect of your investment portfolio is to avoid or exclude companies that do not fit your moral convictions, SRI is right for you.
Finally, if you want your dollars to have the greatest possible positive impact on society, impact investing is for you.
What Kind of Ethical Investing Is Right for You?
ESG, SRI and impact investing are not new terms. Years of data have revealed that ESG and SRI portfolios can perform just as well as non-ESG or SRI portfolios.
So, if you want to get a return on your money without investing in companies that are bad for society or the environment, in our opinion going the ESG or SRI route is a good option.
Impact investing is a bit riskier and requires more time and research. But if you want your money to make a big impact, investing a portion of your portfolio in impact investing could generate excellent returns.
Get your money’s worth>>>>