8 August, 2020
Deciding how you want to Investing your money is often hard. You need to take many factors into consideration such as risk, returns, taxes, and inflation. It takes a lot of forethought and groundwork to figure out a way to get the best return on your investments.
Yet, there are some investors who choose to invest in companies that are not only financially stable but also make a positive impact on the environment. Socially Responsible Investing or SRI is choosing to invest in stocks that provide a financial gain as well as do social good.
The companies are evaluated based on the ESG index: environment, social justice, and corporate governance.
Although socially-responsible investing is still up and coming in India, it is expected to gain greater momentum in the next few years. Companies have become more aware of the ESG factors and are looking to incorporate more of it into their business practices.
Socially Responsible Investing History
Socially responsible investing began in the early 1700s when the Quakers refused to participate in the slave trade in the U.S. Pastor John Wesley, the leader of the Methodist church claimed it was a sin to make a profit at the cost of your neighbor’s well-being. He stated that it was unethical to gamble and invest in industries that used toxic chemicals.
For many decades after John Wesley’s speech, investors avoided industries such as tobacco and liquor referring to them as ‘sin industries’. This evolved in the 1960s when investors decided to invest their money in companies that promoted social causes such as women’s rights and civil liberty.
Socially responsible investing played a huge role in South Africa during the 1980s when investors began pulling out their money due to the apartheid or the segregation of races. SRI had a prominent role in helping bring an end to the apartheid in 1994.
If you look into the American and European nations, they already a family of indices evaluating the sustainability performance of thousands of companies trading publicly. The Dow Jones Sustainability Indices (DJSI) launched in 1999, are the longest-running global sustainability benchmarks worldwide. To be incorporated in the DJSI, companies are assessed and selected based on their long-term economic, social and environmental asset management plans.
For India, S&P BSE has three main indices that measure corporate sustainability: S&P BSE 100 ESG INDEX, S&P BSE GREENEX, and S&P BSE CARBONEX.
How to be a Socially Responsible Investor?
Here are a few points that can help you become a socially responsible investor:
— Know the difference
The first and foremost important step to becoming a socially responsible investor is to know the difference between traditional and responsible investing. The difference might be in returns that you get from your investments. The returns from socially responsible investing may differ a little from the traditional one as you might be leaving behind a lot of high return investment options. However, always remember the reason why you have opted for this way of investing.
— Do your research
This is where investors use negative and positive screening to shortlist investment options. In the negative screening, they avoid investing in companies that don’t relate to their social values. Many mutual funds that are socially responsible screen out tobacco and liquor companies. One type of negative screening is divestment, this is where investors take their money out of certain companies because they do not like their business practices or social values.
Along with screening out negative companies, it is also important for investors to choose companies that align with their values. These are companies that strive to bring change to a social aspect that the investor finds important along with their socially responsible business practices. This is also known as impact investing or incorporation of ESG.
— Use your influence as a shareholder
Shareholders not only invest in companies that align with their values but they also use their position to influence the actions of the company in which they own stock. Investors do this by filing a shareholder resolution. This is a document outlining the shareholder’s suggestions for management on how to run the company in a more socially responsible way.
— Invest in the community
This is where an investor invests in companies that have a positive impact on the community. This is usually done in low-income areas where the investment is used to provide loans to people and small-business owners who would otherwise have trouble getting approved for a loan. Community investments also support ‘green companies’ that have a large carbon footprint on the environment.
— Lead by examples
Socially responsible investing is still in the early adoption phase. By making the right investment choices, you can make a real positive impact on the community- along with building wealth. Moreover, sooner or later, social consciousness will become the selling point for global companies. And you, being a part of it, can lead the movement.
How to get started with Socially Responsible Investing?
1. Decide what your social principles are
Before you choose your stocks you need to decide what social goals you want to promote. You should focus on your values and what you want to achieve through your investments.
2. Decide what your financial goals are
The next step is to decide what financial goals you want to achieve through your investment just as you would with any other investment. You need to decide how much return you need to meet your goals as well as how much risk you are willing to handle. SRI has been shown to provide comparable returns as a traditional stock would.
3. Choose the fund that meets your needs and goals
Once you have decided what your social and financial goals are, the next step is to find the investment that’s right for you. The most common ESG funds in India include Tata Ethical Fund, Taurus Ethical Fund, and Reliance ETF Shariah BeES.
Social investing has also resulted in the success of micro-finance. This was created by social investors to create an impact on small businesses and has now become an industry worth over $8bn and is now a mainstream financial service.
Socially Responsible investing is becoming increasingly popular in India and there has been a visible shift in the market strategy adopted by many participants as they incorporate social, economic and governance (ESG) factors into their investment process. Stakeholders realize the importance of their role in financial markets to influence sustainable growth.
According to the Indian Impact Investors council ‘more than 30 impact funds have invested in social enterprises in India’. There has been $2billion investment in over 300 companies in India.