SRI stands for socially responsible investment. It’s an investment made in a company that conducts its business in a socially responsible way. Socially responsible investments can then be split up into multiple socially conscious companies or through a socially conscious mutual fund or exchange-traded fund (ETF).
When looking into socially responsible investments, you should turn away from companies that produce addictive substances such as tobacco or alcohol. Instead, seek out companies engaged in social justice, are environmentally friendly, or utilize alternative energy solutions.
Socially conscious investing has become more prevalent in recent years due to dozens of new funds and other investment vehicles available to investors. However, these socially responsible investments should still be considered carefully. You must examine the company’s philosophy behind being socially responsible as well as the company’s profitability.
The two goals of socially responsible investments are social impact and financial gain. The two don’t always go hand in hand. You still need to examine if a socially responsible business can profit investors and if a highly profitable business is socially responsible. Finding an investment with both social impact and financial gain is a rare and highly sought-after commodity.
Socially responsible investments are reflections of the political and social climate of the time. It’s essential to consider the inherent risk in socially responsible investments, that what is considered socially responsible one day may not be assumed that the next. For this reason, socially responsible investment is often viewed through the principles of ESG, which stands for environmental, social, and governance. This means that investors look at a company’s management practices and whether they trend towards a socially responsible bent. There is evidence to suggest that this approach works and can improve returns instead of investing purely based on social capital.
For example, investors in the 1960’s were often focused on social issues such as women’s rights, civil rights, and the anti-war movement. As climate change becomes an increasing concern, investors focus on whether or not a company is environmentally friendly. One “evergreen” type of socially responsible investment is community-driven companies. Investing in community-driven companies is often mutually beneficial because they struggle to get funding from banks and financial institutions.