Socially responsible investing is not a new practice, but is receiving the public’s attention in a monumental way.
Social-minded investors have propelled the responsible investing practice forward with such momentum that now one out of every five dollars under professional management is being invested according to socially responsible investing (SRI) strategies. SRI and impact investing are increasingly becoming two of the most popular and lucrative vehicles with which investors can make a positive impact on the world. On one hand this is great news as people are aligning their money with their values. On the other hand, they are going about it in a way that does not protect their assets and may set them up for failure.
To make a positive change on the world through investing first requires a sound financial footing, and any SRI or impact investing strategy must first be based on screening for financial performance before social or environmental benefit. We have to be careful, as mission-focused investing becomes more popular, that we make sure to use a financial screen first when we look at potential investments.
Investing according to SRI strategies involves investments in companies that follow environmental, social and corporate governance (ESG) criteria and avoiding companies that have negative impacts on the environment or society. Investors can also take their value-based investing one step further with impact investing, which makes proactive investments in companies that are working to effect a positive social or environmental change.
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While both SRI and impact investing are mission-driven and financially focused, the screening process differs. Negative screening is a strategy used for SRI in which companies or organizations that do not align with the investor’s values are intentionally avoided. For instance, many investors exclude entities like tobacco or fossil fuel companies or organizations that do not meet diversity, workplace or environmental standards.
Positive screening is used for impact investing and involves investing in companies and organizations that actively seek to create a positive social and/or environmental benefit. Examples of positive screened impact investments include organizations that support underserved communities or address pressing issues like sustainable energy.
The power of socially responsible investing can’t be understated.