Socially responsible investing is an investment style that incorporates not only a company’s financial record, but also its social, regulatory and environmental record as well. Many people believe that this added layer of due diligence creates a better overall portfolio, resulting in more progressive, long-term opportunities.
Socially responsible investing (SRI) is broken down into three components:
- Portfolio screening
- Shareholder advocacy & activism
- Community investing
The screening process is typically based on a number of factors including:
- Corporate governance & business ethics
- Environmental track records and sustainability
- Fair & Safe Workplace
- Safety of products manufactured
- International human rights
- Community involvement
You start out by running negative screens to exclude companies. For example, companies that do not provide adequate corporate governance documentation would be screened out, or companies manufacturing products unsafe to humans or the environment would be removed.
Conversely, you will also run positive screens. These screens strive to include best in class companies. For instance, several companies are very proactive in reducing their carbon footprint, and using non-toxic ingredients in their products. Other companies work to improve their communities, making significant investments in housing, jobs and other social programs.
Screening is very important, however it is only a portion of the process. Few stock holdings fall into the best in class category. Many experts believe that the most important aspect of socially responsible investing is shareholder advocacy and activism. Institutional investors including pension funds and others will file shareholder resolutions on a number of topics, from executive compensation to global warming liability. Their goal is to get these “middle of the road” companies to change for the better. There are many examples of companies changing their policies to be more social or environmentally friendly because of shareholder pressure.
The third component SRI process is community investing. This typically involves dedicating at least one percent and many times as much as five percent of the investment assets toward community investing projects. These projects are both domestic and international in scope and focus on microfinance, affordable housing and job retraining.
If you live your life based on your values, then you should consider using a socially responsible investing strategy. You can consider it putting your money where your mouth is.
This information is for general use only and is not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult your financial advisor prior to investing.
About the author: Peter Krull is President of Krull & Company - a Darien, GA based socially responsible financial services firm. He is a registered principal with and securities are offered through LPL Financial, Member FINRA/SIPC.
