SOCIAL RESPONSIBLE INVESTMENT: WHAT IS IT?
Socially Responsible Investing (“SRI”) invests not only to maximize investor returns, but also to promote social good in the process.
INTRODUCTION
As a former financial advisor to a major broker dealer, I specialized in financial planning for non-profit organizations that wanted to invest in investment products that reflect their respective social values.
To my surprise, my company had very little information about socially responsible investment, and the only available literature was a list of 25-30 mutual fund companies, in which one or more products under a broader umbrella of “socially responsible investment” without any additional information. .
It soon became clear to me that the amount of information available there was limited. It seems that there is a misconception (and it is permanent) that you give up on investment efficiency if you invest in SRI, when in fact the opposite is true. As a rule, companies whose corporate policies uphold the principles of equity, environment, and good governance also improve financially.
As this truth is widely recognized, larger institutions will begin to devote more time, money and energy to expand research institutes and create more R & D products.
SHORT STORY
Socially responsible investing began in the mid / late 1700 during the slave trade, when investors were invited to participate in the practice, and later connected with religious institutions that recommended investors to avoid "sinful" companies that produced weapons, liquor or tobacco.
In the socially responsible investments of the 1960s, there was a desire for greater social concern for women's equality, civil rights and equality in the world of work, as well as additional environmental issues in 1970 and global social issues such as apartheid in South Africa.
Since 1990, research institutes have increasingly embraced the leading arena of positive investments in the environment, social justice and corporate governance (usually referred to as “ESG”, although I will use the SRI label, since it is still the term most widely recognized at the time of writing).
TRENDS
According to a recent study published by the Social Investment Forum, the research institute continues to grow at a healthy pace. In early 2010, SRI's assets reached more than 3 trillion. Dollars. That increased by more than 380 percent from 639 billion dollars. The United States in 1995, with the date of the first report published by the Social Investment Forum, covered these statistics.
Since 2005, SRI's assets have increased by 34%, whereas traditionally managed assets have grown by only 3%. And from 2007 to early 2010 (during the recession), the growth of traditional, professionally managed assets was less than 1% compared with an increase of 13% in SRI assets. Today, about 1 out of every 8 dollars is invested in some form of socially responsible investment.
The Social Investment Forum attributes much of this growth to customer demand and, to a lesser extent, legislation and regulation.
INVESTMENT STRATEGIES
There are essentially three SRI investment strategies:
Positive / negative screening:
Positive screening involves an active search for companies that do good. This allows the investor to choose companies whose corporate practice corresponds to their values. For example, if an investor is specifically concerned with protecting the environment, they may prefer to invest in a solar energy company.
Many people think that investing in companies that promote social or environmental causes means that you have to sacrifice results, but in fact the opposite seems true. Marc J. Lane, author of Profitable Social Responsible Investment, found that companies that have gained the highest value for social and environmental issues actually perform better financially. In fact, according to Lane, the stocks of these companies exceeded the Russell 3000 index by more than 2.5% during the eight-year study he conducted.
Negative screening is what the name suggests - screening out companies that have corporate practices or products or services that do not fit the social good. For most SRI investors, this has traditionally included contractors for the production of tobacco, pistols, alcohol, gambling and protection. But it was also expanded to include companies whose leadership did not promote employee equity, diversity, or environmental or corporate responsibility.
Active member
The active participation of shareholders involves an attempt to influence changes in corporate practice or policy, directly talking with management or submitting decisions of shareholders, which shareholders then vote for. When the idea of asset shareholders was first introduced, the number of resolutions filed by shareholders was less than 20 per year. From 2008 to 2010, the Social Investment Forum reports that more than 200 institutions have submitted proposals from shareholders, and many of the proposals are accepted.
Community Investing
Investing in communities involves direct capital investments in low-income community members through local banks / lenders (also collectively called “Community Development Financial Institutions” or “CDFIs”). These lenders provide access to loans, capital and capital, which otherwise these individuals or enterprises would never have access to if they apply for loans through traditional commercial banks. Community investments can also be realized through venture financing.
By investing directly in the community, the investor is more likely to have a greater impact on the social good. Although buying shares of companies may or may not contribute to social benefits, money invested in a CDFI or venture capital fund will begin to act directly and immediately to promote non-service communities.
SRI Products: TRENDS
MUTUAL FUNDS AND EXCHANGE FUNDS ("ETFs")
Currently there are more than 250 mutual funds that are specifically designed to align investments with certain social values. Some mutual fund companies are exclusively focused on research institutes, such as Calvert, Domini, PAX World, Ariel, Sentinel, Winslow and others, while larger companies with mutual funds, such as Vanguard, Neuberger Berman, Gabelli, Legg Mason and Dreyfus, some of them have one or more investment products that affect certain social problems, but SRI is not their main task.
While mutual funds provide an effective way to invest in a diverse group of companies that represent specific social values, they have certain limitations that you must consider before investing.
First, mutual funds tend to be expensive. Many mutual fund companies charge ongoing fees in addition to fees for buying or selling stocks.
Secondly, mutual funds are a passive way to invest in research institutes without control over the choice of a company. If you take a closer look at some of the mutual fund companies that claim to be interested in investing in socially responsible companies, you may be surprised if you find companies that do not comply with SRI standards.
Finally, many mutual funds simply cannot defeat a simple, static product that tracks an index, for example, exchange-traded funds (ETF). One of the first SRI indices, FTSE KLD 400, which began in 1990, continued to compete — with a yield of 9.51% from its inception to December 31, 2009, compared with 8.66% for the S & P 500 per same period. For a small portion of the cost of investing in a mutual fund, you can simply buy ETF stocks that track FTSE KLD 400, and do the same if not better.
Currently, there are about 26 ETFs to choose from, and although they represent only about 1 percent of total assets invested in SRI, since 2007 their assets have grown by 225%, which is the fastest of all registered investment products.
SHARES AND BONDS
Sometimes a more direct way to invest in socially responsible is to invest directly in stocks or bonds of solid, financially sound companies that appeal to your values.
There is a misconception that when you invest in stocks of individual companies, you increase your risk because you reduce the number of companies you invest in, focusing the risk on several investments. This is true only if you do not conduct research and do not invest in companies that are not financially, socially and ethically sound.
To begin the search, annual publications of leading SRI companies are published in several publications. If you simply don’t have the time or you want to do a study, an ETF is a great option, or you can subscribe to the two-month New Paradigm Wealth newsletter, which offers investment ideas, trends and notable companies.
ALTERNATIVE INVESTMENTS
Alternative investments include hedge funds, venture capital funds, private equity funds, property funds and other unregistered limited liability partnerships or limited liability companies that are usually available only to accredited and highly valued investors. In other words, these are investments that typically have a high minimum initial investment requirement of $ 50,000 or more, which are available only to the rich.
This is not necessarily for everyone, but unlike mutual funds, hedge funds use managers who have the flexibility to buy and sell using investment technologies and strategies that are usually unavailable or even prohibited by mutual fund companies due to regulatory restrictions.
Greater flexibility usually means better ability to adapt to different market conditions and the potential for higher returns.
This area of research institutes has increased dramatically since 2008 with an increase in managed assets by 610%, aided by the growing interest in clean technology and renewable energy sources.
COMMUNITY INVESTES: Financial Institutions for Community Development ("CDFIs")
Community development Financial institutions comprise: community development banks, community development credit unions, community development credit funds and community venture capital funds. Each of these is a different type of lender that makes capital available to individuals or small businesses in unserved communities.
Since 2007, assets in community investment institutions have grown by more than 60%.
Today, many of these institutions are turning to their target clientele on the Internet. Kiva.org is one such organization that specializes in providing microcredit to entrepreneurs in developing parts of the world. The repayment rate is 98.99%, and interest rates are different, but more competitive than the savings rate of banks.
GLOBAL TRENDS
In 2011, there are several global trends that will help attract investment in research institutes, such as a positive outlook for the global economic cycle (out of the global recession), demographic shifts (rapid population growth in Asia, and an aging population in the US), new technologies, climate change, by the way, which all play a certain role in determining where the cash flows are.
In particular, green investments related to clean technologies and renewable energy sources are one of the most dominant themes in 2011, which stimulate an increase in investments in research institutes and, in particular, alternative investments in research institutes (i.e. E. hedge funds, private accommodation).
To make a smart choice about where to put your money, it's a good idea to take a step back from the various available investment funds and look at the big picture. What changes are made by investment in the industry, and in particular, companies that are likely to work well in a socially responsible space?
WHERE FROM HERE?
Through the weekly posts and the two-month newsletter, New Paradigm Wealth hopes to send investors through the SRI options that make sense right now. On our website, I listed several resources that will serve as a guide for making sound investment decisions as a socially responsible investor.
It is time to reconcile your values with investment decisions that are consistent with what you believe in, what you need, what is important to you.
Hope to see you on the go!
