Broker Check

Sustainable Responsible and Impact Investing

The goal with SRI investing is to align your investments with your values, without losing returns.  It used to stand for Socially Responsible Investing and you do hear that definition still today.  You also hear terms like green investing and ethical investing.    But these days it really refers to Sustainable Responsible and Impact Investing.    In addition to normal financial criteria like earnings and profits, it takes Environmental, Social and Governance factors into account (or ESG).  SRI and ESG are the two main acronyms that you see and hear in this arena. 

Sustainability refers to all aspects of the business model and the environment.  For example, think about oil companies.  If their only source of revenue is drilling oil, there is a finite supply of oil and many people are trying to reduce reliance on oil so only providing oil is probably not a sustainable business model. Burning oil also contributes to climate change so it is also not environmentally sustainable.   That does not mean that all oil companies are automatically excluded from any SRI portfolio.  If they have a very good safety record and also engage in alternative energy sources they may still be a candidate within some mutual funds. 

Responsibility refers to how the company acts as a corporate citizen.  How do they treat their employees, their customers, their communities and their environment?  Do they provide good employee benefits and work environment?   Is customer and employee safety more important than profits?  I’m showing my age but I remember the Tylenol cyanide scare back in the 80s, where someone was opening packages on store shelves, adding cyanide to the capsules and then returning them to store shelves.  The makers of Tylenol got very high praise for pulling all Tylenol from the shelves to make sure no further customers were hurt, even though it was a huge short term hit to their profits.  Long term it worked out well because it raised the level of trust that consumers had in their product.

Impact investing refers to choosing investments specifically geared toward having a positive influence on the world.  Think alternative energy companies or focusing on clean water.  Often this is what people think of when they hear responsible investing.  However, because this often involves narrow sectors of the economy, it is often a small portion of a portfolio. 

Focusing more on the ESG criteria, consider corporate governance.  SRI managers will look at the Board of Directors to see how much diversity they have on the board and how independent the directors are.  They’ll look at political contributions of the corporation and anti-corruption policies.  Executive compensation is a factor.  How highly are the executives compensated compared to the rank and file employees? 

Within the social criteria of ESG, avoidance of Tobacco or other harmful products is considered a negative screen.  You are screening out things that are negative.  These are often things that are considered “sin stocks” like tobacco and alcohol and weapons.  But social criteria also include positive screens, which means looking for companies that score well on human rights issues and community development programs.  It would include areas like workplace safety (a big one during the pandemic) and employee benefits, as well as labor relations and diversity and anti-bias issues.   SRI fund managers are looking for companies that score well in as many of these areas as possible.

Many people immediately think of climate change when they think of environmental issues,  but it also includes things like water use and conservation, how sustainable a company’s  natural resource use is, and how big a polluter they are.   Are their offices in “green” buildings and do they use clean technology?  Different sectors of the economy automatically tend to score higher in this area.  Technology companies, for example, tend to score fairly high on environmental issues where an oil company would probably not.   That’s why it is important to look at all three areas and not just focus on environmental issues.