Going green: understanding the concept of socially responsible investment

Green hand and leaves
Photo: Rawpixel, Pexels

Money makes the world go round. Ever since mankind invented the concept of wealth, the pursuit of amassing and the protection of said wealth has been one of mankind’s most prominent goals. The Code of Hammurabi, a set of laws governing how the Babylonian empire works even included passages on financial obligations, loans and what might be the earliest known record of investing.

The concept is simple, using methods, tactics and analysis gleaned from prominent figures and/or trading courses, you divest a certain amount of money into an asset under the idea that that asset is going to make you even more money. The goal has always been to maximize profit while expending the least amount of resource possible. Recently though, as society continually grapples with issues that challenges the traditional foundation of a society, a new, ethical form of investing has emerged.

Socially responsible investing for the betterment of society

In simple terms, socially responsible investing (SRI) is a method of investing in which investors account for morals and ethics on choosing which company to invest in. The general gist is that you don’t invest on companies that deals in product that harms society as a whole (tobacco, gambling, guns) or those that engages in shady business practices (labor issues, racial discrimination, illegal logging). Alternatively, it is possible for investors to try and change how the companies work from the inside by using their status as a shareholder.

It is different with outright charity in that socially responsible investors still expect to make some profit, they’re just being more conscious in how that profit is made. As global awareness have grown in relation to issues like climate change, human rights and the plea of the immigrants, socially responsible investing has moved towards companies that actively tries to engage those issues, directly or indirectly. This is mostly accomplished in three different ways, which are:

Investing in socially responsible companies

Despite growing awareness and demands to companies to adopt some measure of social responsibility, CSR initiatives are still little more than window dressing and PR stunts. SRI attempts to remedy this by asking investors to literally put their money where their mouth is, investing in companies that are either trying to solve humanity’s pressing issues or engage in responsible business practices.

This could range from investing in companies that are developing biodegradable plastics and packaging, companies that deal exclusively in fair trade products or on companies researching for a better way of harvesting renewable sources of energy.

Shareholder advocacy

Instead of continually criticizing companies from the outside without proposing a solution, SRI tackles this issue by investing directly on certain companies and try to influence decisions that could carry great ramifications to society as a whole. Public companies are legally required to hold a shareholder meeting once each year, the only time companies’ management can engage in a two-way discussion with shareholders to decide the future of the company.

A shareholder meeting is also the place where voting for various issues affecting the company is held. As such, even if you have no particular issue to raise with the company, you can still try to steer the company’s direction as a shareholder.

Community investing

Community investing involves you acting as a loaner to under-served communities around the world whose access to financial loans is limited to loan sharks and other questionable lenders.

Community investing allows these communities access to low-interest and ethical loans that won’t be used just for investment capital but also to provide basic services like healthcare and education.

Responsible, with a caveat

The problem with SRI is that it is a highly idealistic way of viewing investment. Truth be told, no companies above a certain size can rightly claim that their business is free of questionable practices and that even if they claim that they do, you don’t always have the power to verify those claims. Limiting your portfolio to SRI alone might not be practical but given the long term benefits to society as a whole, SRI should always be a consideration.