Primer on Socially Responsible Investing

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). 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 Grameen Bank in Bangladesh, a community-owned bank that provides microfinance and banking services (very small loans) to small rural enterprises. Very often governments also encourage community investment by giving tax credits and other benefits to investors who are willing to channel their investments to new industries or disadvantaged regions (e.g. government-sponsored venture capital funds). According to the SIF, assets under community investment have grown more than 388% in the past 10 years, making it one of the fastest-growing segments of SRI (Graph 5 - 6). d. Investment Integration Rather than focusing on "negative screening", this new strategy seeks positive performance criteria by directly integrating social, environmental and ethical factors in the conventional financial analysis in order to maximize returns of an investment portfolio. This more "holistic" approach is gaining popularity in Europe but is still relatively rare in North America. The Future According to its 2005 Report on Socially Responsible Investing Trend in the United States, the SIF asserted that SRI is getting more popular than ever. SRI assets have grown faster than the entire universe of managed assets in the US in the past 10 years. From 1995 to 2005, SRI assets have increased more than 258% from US$639 billion in 1995 to US$2.29 trillion in 2005. As SRI is gaining ground around the world, the concept of SRI keeps evolving. In the near future, we can look forward to a continued growth in SRI assets, with an increasing diversity of screened issues, as well as higher involvement in the emerging markets, particularly through community investment. Data source: Social Investment Forum (SIF) Add to document.write("Del.icio.us") | Yahoo! My Web Technorati: Thomas Lau, CFA, FRM, CIM, CDipAF, MDE