Socially responsible investing (SRI) is an investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition strategy that aims to provide financial return while encouraging positive social change. SRI allows people to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition in companies that align with their values or beliefs, and avoid those companies that don’t.
For example, you may decide to only invest in companies that have “net zero carbon footprints” or avoid industries or companies that operate in conflict areas. It’s often associated with supporting environmental, social and governance initiatives that have a positive societal impact.
Also known as:
- sustainable investing
- responsible investing
- ESG investing (based on Environmental, Social and Governance factors)
- socially conscious investing
- ethical investing
- green investing
How SRI works
SRI is an investment approach that considers both the financial return and the social good that a company generates. A wide range of companies across numerous industries could be considered socially responsible.
To determine a company’s suitability, investment advisers as well as individual investors screen companies based on a variety of environmental, social, and governance factors. SRI-based screening can be either positive or negative.
Positive screening – selects companies that demonstrate good SRI practices.
May include companies that:
- Take good care of the environment.
- Create eco-friendly products.
- Reduce greenhouse gas emissions.
- Support good employee relations.
- Promote women in leadership opportunities.
- Are involved in local communities.
- Take a stand on climate change.
- Respect human rights and diversity.
Negative screening – excludes companies that the investment adviser or investor perceives as having poor SRI practices or that have a negative impact on society through the products or services they provide.
As an alternative to screening, investment advisers might practice “ESG integration,” which means they embed environmental, social, and governance factors into traditional financial analysis, with the aim of gaining a more complete understanding of an investment’s value and prospects.
Investment advisers may also take an active approach to SRI, by investing in companies and then engaging with them to improve these companies’ environmental, social, and governance practices.
3 reasons to choose SRI:
1. Promote sustainability
By investing in sustainable companies with good track records of managing their impact on people, profitsProfits A financial gain for a person or company. Equals the money left over after you subtract your costs from the money you made.+ read full definition and the planet (known as the “triple bottom line”), you’re encouraging their best practices.
(Note: Could be a new glossary entry. “The triple bottom line (TBL) measures a company’s financial profitability, as well as its social responsibility and environmental impact. The three facets are referred to as people, profits and planet.”
2. Opportunity for returns
You don’t necessarily have to give up on financial performance to invest responsibly. Some studies have shown that companies that maintain high SRI standards can deliver competitive financial returns for investors.
3. Wide variety to choose from
You can invest in socially responsible stocks, ETFs, mutual funds, and fixed incomeFixed income An investment that pays regular income to you. Examples: Guaranteed Investment Certificates, Canada Savings Bonds and types of other bonds.+ read full definition products. There are also socially responsible alternative investments, such as private equityEquity Two meanings: 1. The part of investment you have paid for in cash. Example: you may have equity in a home or a business. 2. Investments in the stock market. Example: equity mutual funds.+ read full definition, venture capital and real estateEstate The total sum of money and property you leave behind when you die.+ read full definition.
You can work with an advisor to help you select socially responsible investments or identify suitable ones on your own.
Watch this video to learn more about socially responsible investing.