Socially Responsible Investing: How To Save The World And Make A Buck

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Socially Responsible Investing: How To Save The World And Make A Buck

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Making greed good

Investing can be a great way to make money – but as anyone who’s seen The Wolf of Wall Street knows, greed can sometimes go too far. Thankfully, there’s an entire realm of investing that considers the benefits beyond mere financial return, and it’s growing at a rapid pace. Welcome to the world of socially responsible investing.

What’s that? Put simply, socially responsible investing is about considering the ethical as well as the financial consequences of your investments. There are a whole range of ways to do this: you could refuse to invest in tobacco companies; prioritise those reining in their carbon footprints; or focus on how bosses’ pay compares to that of the average employee.

Why invest in a socially responsible way? Some might say it’s the right thing to do. But it can also be a good way to make money. Top US stocks with high environmental, social, and governance (ESG) scores have been shown to perform significantly better than their lower-ranked counterparts. And investors are increasingly cottoning onto this: the amount of money invested in ESG-focused funds over the next few decades is expected to equal the entire value of the US’s top 500 public companies today.

How do I become a socially responsible investor? First of all, you have to come up with your own definition of what makes a company “ethical”. Once you know what you’re looking for, you can invest in companies that meet your criteria directly, or via ESG funds that put your money into loads of different companies.

There are also more specific strategies: “impact investing” involves funding companies that are specifically geared towards making a positive difference to the world, while alternative ethical investments include loaning money to people in developing countries.

"Impact would be hugely important to me. I would settle for a lower return if I knew my money was not doing bad, but rather doing good."

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This Pack will give you all you need to know to invest with a clear conscience. But first: what does “ethical” even mean?

Deciding if a company's ethical

Philosophers have been arguing for millennia about what makes something morally right. Ultimately, only you can decide if a company aligns with your values. That said, here are some things you might want to consider:

Are they a “sin" company? Any business involving alcohol, tobacco, gambling, sex, or weapons has the potential to violate a lot of people’s moral codes. The “exclusionary” approach of avoiding investment in these companies is the oldest form of socially responsible investing.

What’s their environmental impact? As understanding of climate change and its effects has grown, so too has the desire to avoid investing in the worst polluters. You might want to swerve fossil fuel producers or factories that aren’t trying to reduce their emissions. By contrast, you may favor firms that have good initiatives to combat waste and promote sustainability.

Do they contribute to society? Big companies have a big impact on the places where they operate. Are they avoiding taxes or exploiting their suppliers? Are they blasé with human rights, employee wellbeing, or data privacy? Or do they have great community outreach programs? These are all questions you might want to consider.

Do they have good corporate governance? Having an independent board of directors and shareholders that have some say in what a company is doing is really important. Without good governance promoting a good company culture, fraud, corruption, and all sorts of other crimes can spring up.

Now that you’ve got an idea of what to look out for, we’ll explore how to actually get involved in ethical investing.

Finding ethical investments

Now that you’ve got your criteria, it’s time to go about finding investments that match them. To start with, looking at companies’ websites (which may include sustainability reports), Wikipedia entries, and news mentions should help flag up any big issues to be aware of.

How can I dig deeper? Tools like Yahoo Finance give companies sustainability scores and sector comparisons. Be sure to look at the basis for these metrics, though – their definition of ethical might be different from yours. And different providers often disagree: in September 2018 one analytics firm ranked Tesla as the world’s most sustainable car maker – but another put it dead last.

This sounds really time-consuming – is there an easier way? Rather than picking individual companies, you can invest in a fund that tracks the value of a bunch of different stocks. There are tons of ethical exchange-traded funds out there, including via robo-advisor platforms, and investing in these is a good way to diversify your portfolio while letting someone else do the hard work of establishing ethical criteria and then tracking them over time.

Anything else? Remember that sustainability is notoriously tricky to quantify. Scores tend to be higher at larger companies, or those in countries which demand detailed reporting – but that heightened transparency doesn’t necessarily mean those companies are actually more ethical. Doing your own research is important if you want to be sure your goals are met.

What about returns? As well as supporting ethical business, you’re also aiming to get a good return on your investment – and you should therefore still look at company “fundamentals” like growth and the ratio of its profits to stock valuation. Furthermore, different areas of sustainability may have a bigger impact on returns at different companies: for example, strong anti-corruption measures at a bank are likely to lead to better profit than at an energy company, where environmental innovation may have a bigger impact on earnings.

What other investment options are there? If you’re particularly picky about where your money goes, you might want to consider investing in a smaller, actively managed ethical investment fund – though this will increase your costs. If you’d rather invest in less-risky debt, you can also find ethical bond funds on offer.

We’ll tackle another way of doing things next, which focuses on impact investing.

Impact investing

Ethical investing involves “negative screening”: companies in certain sectors or with particularly low sustainability scores are excluded, but the others are all fair game. You could say the primary focus is on avoiding the bad.

So what’s impact investing? Primarily, funding the good: investing in companies that are actively doing things to make the world better. Think renewable energy companies, or those developing innovative health technology. Some “activist” impact investing also aims to transform existing companies, amassing lots of shares in order to put pressure on them to become more sustainable.

Impact investing isn’t just about the potential for positive change involved: key too is using the money strategically. If two companies are working towards the same thing, but one needs half the amount of cash to get there, that gives you more bang for your buck – and frees up money that can be put to good use elsewhere.

How is impact measured? With difficulty. There’s no global standard, and instead lots of competing definitions. IRIS, one leading measure, looks at things like what an investment will do, how many people it helps, and how much it helps them. Turning this into an actual number is tricky, however. Some governments try to put an “economic value” on a human life (it’s around $10 million for US citizens), but measuring the relative impact of activity in different parts of the world is no mean feat. It’s always worth looking at the criteria different firms use to measure impact, and see how much you agree.

How do I become an impact investor? There are impact indexes (like those which compare sustainable energy companies) and exchange-traded funds that hold a basket of different impactful companies. You could also try to measure impact yourself and then invest in individual companies, although that’s easier said than done.

Onto the next and final section – where we’ll talk about some funky alternatives.

Crowdfunding and microfinance

There are two main sustainable investing techniques we haven’t yet looked at, the first of which is ethical equity crowdfunding. If you’ve read our Equity Crowdfunding pack, you’ll have an idea of what this entails: in short, it’s where you buy shares in an early-stage company in the hope of seeing some sort of return as it grows over time.

Some platforms exist solely for ethical equity crowdfunding, where the only companies you’ll see on the platform are those doing some kind of socially responsible work. Hydropower, marine conservation, and recycling are all options. This can be a great way of helping early-stage impactful businesses get off the ground, and could bring you some big returns too – though there’s a correspondingly high risk of losing your investment.

Anything else? Microfinance loans are another exciting way to help people. With platforms like Kiva or Lendwithcare, people without access to banking can request loans for things they need – for example, a rice farmer in Cambodia might ask for money to buy a new “iron buffalo”. You lend them the cash, and after a couple of months or years, you’ll be repaid. You won’t get any interest, but you’ll have helped people who really need the money – and it hopefully won’t cost you a penny, bar inflation (though there’s always a risk that the borrower defaults on their loan, or that you get stung by a change in the currency exchange rate).

Finally, it’d be remiss of us to not mention charities: some things simply don’t happen without philanthropy, so if you’re making big returns on your other investments, you may want to think about donating some of that money to a good cause.

And that’s that. Hopefully, this Pack has given you the tools you need to get cracking with socially responsible investing. Take this new knowledge, get out there, and make the world a better place!

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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