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Socially Responsible Investing: What Financial Planners Should Know

What is Socially Responsible Investing (SRI)?

Socially responsible investing looks both practically and ethically at strategically placing a client's money and wealth in assets that make a positive impact on the world. It is the alignment of a client's personal values and ethics to their investment portfolio, though differs from environmental, social, and governance (ESG), which analyses the risk, policies, and practices of a company.

The prevalence of SRI continues to increase, with more of the population choosing to navigate their decision-making in a way that aligns with their own moral compass. The increase in the adoption of SRI can also be attributed to rising concerns of individuals around the way businesses impact our environment, and the implications they may have on society for future generations. This has created a need for measurable impacts on businesses around social and environmental issues, alongside the traditional reporting of financial returns. In the US, Sustainable & Responsible Investment reached $17.1 trillion in total sustainable investment assets under management - representing a 42% increase since 2018.

A socially responsible investor would typically avoid investing in companies that are associated with things like:

  • Pollution & environmental damage
  • Tobacco & gambling
  • Human exploitation and labour violations

How does socially responsible investing affect communities for the better?

The SRI approach to finances involves an adviser consciously placing a client's money where it can have the best long-term success, whilst also aiming to intentionally avoid damaging or exploiting our environment, marginalised communities, social groups, or first nation cultures, opting to invest in companies that will use their funds in the most conscious ethical way.


Understanding socially responsible investing

In the ever-changing landscape of socially responsible investing, it is important for advisers to understand the basic fundamentals of SRI best practices in order to better support clients in tailoring their portfolios toward investing in companies or funds that align with their own personal beliefs and values.

SRI is a very bespoke approach to investing as it is inherently linked to the personal, social and environmental values that a person holds. This means the portfolio becomes highly individual and the analysis quite detailed, which can necessitate a greater amount of time required to provide advice.

A great tool for advisers when engaging with SRI is a.i.'s WealthMap, which looks at the client's goals and values first and foremost, prior to recommending investments. WealthMap ensures there is alignment between the financial outcomes a client wishes to achieve, along with their own intrinsic values and beliefs. 

Achieving this requires some attention to the balancing of values, financial goals, risk, and the investment's ESG mandate, as it can be easy to hyper-focus on the ESG impacts, but neglect the risk or returns of that particular asset.


Types of Socially Responsible Investments

There are no particular standards or measures used for SRI, which makes it difficult for investors to conduct accurate analysis or benchmarking outside of traditional performance reporting.  With the FTSE and a growing number of socially conscious investors supporting an SRI approach, there are initiatives coming to fruition to create indices to cover areas like the environment, human rights, and employee rights.


Ways to Make Socially Responsible Investments

There are generally a couple of methods of screening a company to create an SRI class of investments. Positive Screening and Negative Screening methods can be exemplified by an investor making a conscious decision to not invest in companies that are involved in a particular sector like oil or tobacco, and instead seeking to invest in businesses in renewable energy sectors.

  1. Positive Screening

Positive screening is a function investors use to assess investment instruments; locating and investing in companies or stocks that have a positive impact on the environment and society. For example, they will target organisations that are actively advancing positive change for a particular industry or social cause.

  1. Negative Investing

On the flip side, investors will also use negative screening to filter out investments that are contentious or detrimentally impacting our environment and societies.

For example, sectors with a high carbon footprint, despite being profitable, will be screened out of the investment process.


Is socially responsible investing regulated?

In March 2021, the Securities and Exchange Commission (SEC) introduced new environmental, social, and governance (ESG) disclosure requirements, and under this new regime, public companies now must improve the way they disclose climate-related issues, moving away from voluntary to more regulated disclosure. Even though these regulations require more definition, and various frameworks exist around standardising ESG measures and reporting like the Carbon Disclosure Project, Climate Disclosure Standards, the Global Reporting Initiative (GRI) and Sustainability Accounting Standards, it is common that companies use a combination of frameworks.

There's also a newly formed International Sustainability Standards Board, whose mission is to define standards around ESG for investors, and with the introduction of recent regulations and these types of bodies, a company’s environmental and social impact activities should start to become more transparent for investors.


Does socially responsible investing work?

The critical step in ensuring SRI works lies in the quality of data, benchmarking, and reporting that companies follow and make available to investors. With no standardisation across these areas being enforced by regulation, SRI will remain to operate in a grey area.

A recent survey conducted by Deloitte, examining executives in public companies that have more than $500m in revenue across industries in finance, legal, accounting, and sustainability, found that 57% of executives indicated that access and quality of their data was the biggest challenge faced around ESG disclosure. Thus, organisations require a strategy to design better data capture and standardise reporting around ESG frameworks.

There are significant pressures from consumers and shareholders for companies to improve SRI practices and policies, pushing businesses to act as good corporate citizens, alongside achieving financial performance.

Once we reach some standardisation around ESG frameworks and regulation, socially responsible investing will definitely work, but until the data, frameworks and reporting reach a level of maturity, there will continue to be grey areas to wade through when it comes to choosing socially responsible based investments.

With consumers placing more and more importance on values-based decision-making, the demand and ubiquity of socially responsible investing will only increase with time. It is important to ensure that advisers are equipped with both the knowledge and tools, be it appropriate indices, practices, or policies, to help guide their clients through socially responsible investing with success.  


 If you want to learn more about how the Advice Intelligence software can support your efforts in Socially Responsible Investing and how to implement that into your advisory practice, Book a Demo or contact us directly.