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Are you Ready for Responsible Investing?

By Kevin Johnston on January 18, 2022

Reading Time: 4 minutes

Investors increasingly demand that their investments go to companies that demonstrate ethical behavior while contributing to the well-being of society and the planet. The term “responsible investing” has become a catch-all term that can include helping the underprivileged, promoting equality, reducing harmful emissions, and using alternative energy sources. What you consider responsible investing depends entirely on your values and interests.

Key Takeaways

Is there a difference between ESG and socially responsible investing?

What is impact investing

How can I invest responsibly


Environmental, Social, and Governance (ESG) Investing

Responsible investing means looking after the planet

The most well-defined type of responsible investing is ESG. The Sustainability Accounting Standards Board (SASB) has created 77 standards for specific industries, and it provides reporting guidelines for companies.

The general requirements in three major areas are:

  1. Environmental
    Companies must issue sustainability reports.
    Businesses must limit pollutants they emit.
    They must show efforts to eliminate greenhouse gasses.
    They must use renewable energy.
  2. Social
    Companies use vendors and suppliers that are ethical.
    THey support diversity.
    Businesses must have measures to prevent sexual harassment.
    Wages must be fair.
  3. Governance
    Company boards must be diverse.
    They must maintain corporate transparency.
    They should embrace corporate transparency
    The CEO must be independent of the chairman of the board.

What do companies get for being ESG compliant?

There are no official rewards or sanctions based on ESG compliance, but the SEC has made it mandatory for public companies to publish information on ESG-related risks. It also requires disclosure of whether and how diversity is considered.

Since investors have become more aware of social, environmental, and governance issues, companies that comply can attract investors with greater ease. ESG companies may expect high morale and a positive reputation.

ESG rankings are well-known, so any significant business must maintain a respectable track record to attract venture capital, stock purchases, and bond buyers.

Socially Responsible Investing (SRI)

SRI means looking for companies that do not make money from alcohol, gambling, or tobacco. In other words, the first criterion is that they do no harm. Companies that are in what are perceived to be harmful industries do not attract social responsibility investors.

Beyond that, many investors look for companies that take positive actions to contribute to social justice and environmental sustainability. That is, they look for businesses making a conscious effort to make positive changes.

While there is much crossover between SRI and ESG, SRI is generally based on do-it-yourself research. You must read each company’s philosophy and understand its actions. You measure the company based on your values rather than a set of published guidelines.

Impact Investing

Some investors use the term “impact investing” to refer to choosing companies that can create specific positive outcomes. For example, a person could invest in solar and wind power, recycling, or anti-climate change operations. The idea here is that the company makes its living doing positive things.

SRI and ESG can include companies that do good work in addition to their primary business. In contrast, impact investing often refers to companies whose actual business is improving the world. This can include companies in emerging markets where there is an opportunity to enhance the standard of living in the region.

What About Profits?

Investors want to make money. So responsible investing means taking into account how profitable a company is.

The Global Impact Investing Network (GIIN) found in a survey that most impact investors are looking for competitive returns on their money. In fact, 88% of impact investors said their investments provided good to great returns.

Some investors are willing to take a chance on startups that are disrupting their industries to make a positive impact. In such a case, an investor may be willing to accept higher risk in order to support an initiative. In other words, the “reward” in the risk-reward ratio may be as much about the impact as the profits.

Where do I find responsible investing opportunities?

Many brokers and platforms offer responsible investing opportunities, but some focus entirely on SRI, ESG, and impact investing. Here are some examples.

OpenInvest allows you to indicate the issues you care about the most. Then it shows you opportunities that match your interests.

SVX is a Canadian platform that supports private ventures and funds in areas such as cleantech, health and wellness, and diversity. The opportunities are intended to make money for investors. Note that all the investments are in private securities, not public markets.

Earthfolio is a place to invest in mutual funds and ETFs that meet ESG requirements. You complete a questionnaire to indicate essential issues, risk tolerance, and financial goals. You are matched with a stock portfolio most suited to your concerns.

Ellevest focuses on women. This platform creates a portfolio based on your preferences so you can invest in practices and opportunities that promote leadership and inclusion for women. Men can invest in these opportunities too.

Note that prominent companies such as Morgan Stanley, Fidelity, Kiplinger, Vanguard, and Blackrock offer responsible investing portfolios. In short, you can search for specialty platforms, but you can also deal with major brokerages, platforms, and investment firms. Your best bet for these is to search for “responsible investing” or “sustainable investing” within each platform.

How do I find individual companies that offer responsible investing opportunities?

If you want to do your own homework instead of having someone else create a portfolio, begin by reviewing ESG-rated companies.

Investor’s Business Daily publishes its list of the top 100 ESG companies annually. That does not mean you should blindly follow their recommendations. Treat the list as a good starting point for doing your own research into companies.

If you want to dig even deeper, try the MSCI research tools. There you can find out ESG ratings for individual companies, as well as ETFs.

Conclusion

Gone are the days when solar, wind, environmental, and social impact concerns were considered the fringe. Most companies have an ESG rating, and investors search beyond those ratings to learn about the practices of each business. Responsible investing has gone mainstream.

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