Socially responsible investing definition

What is socially responsible investing?

Socially responsible investing is the process of selecting assets to buy based on their social impact as well as on their potential financial returns. It is also known as sustainable investing, socially conscious investing, green investing and ethical investing. Socially responsible investing is closely linked to impact investing, which seeks to make tangible positive change.

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What characterises a socially responsible investment?

This type of investment is characterised by a conscious decision to invest in a company or fund deemed socially responsible. As with any investment, it is also characterised by the desire to make a profit.

Investors typically select companies or funds concerned with social justice, sustainability, green energy, clean technology, and other similar areas.

Socially responsible investing might also be characterised by an avoidance of industries perceived to have a negative societal or environmental impact, such as alcohol, tobacco, oil and gas, fast food or gambling.

Types of socially responsible investments

Investors might choose to buy stocks and shares in companies that match their values, or that have robust environmental, social and governance (ESG) policies in place. For example, the MSCI United Kingdom SRI Index is a capitalisation-weighted index that only provides exposure to those companies that have outstanding ESG ratings. Another way to invest in a socially responsible way is through mutual funds and exchange-traded funds (ETFs). There are many funds that either explicitly invest in companies pursuing socially responsible endeavours, or that will only invest in companies prioritising ESG factors in their operations.

History of socially responsible investing

Responsible investing has always been a concept and many shareholders have tried to use their power to influence the wider world for decades. One famous example is the pressure put on fund managers to avoid investment in South African companies before 1990, which ultimately played a part in ending apartheid.

The concerns of investors with socially responsible aims have historically reflected wider societal issues.

  • 1960s – investors boycotted companies supplying weapons for the Vietnam War. Community development banks were established in low-income areas and led to the formation of the Civil Rights Act and Voting Rights Act
  • 1970s – investors became increasingly concerned with corporate behavior, and environmental issues came to the forefront
  • 1980s – socially responsible mutual funds were established. New concerns came into play, including nuclear energy

Socially responsible investing is now enjoying more mainstream popularity as investors and government bodies become increasingly interested in ethical behavior.

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