Socially Responsible Investing (SRI) and other Three Letter Abbreviations (TLAs)
We all know that the world of investing is full of jargon and once you get into a specific sector such as Socially Responsible Investing (SRI) then it’s abbreviations and TLAs all the way.
SRI used to stand for Socially Responsible Investment but is also referred to as Sustainable and Responsible Investment to reflect growing interest in the sustainability agenda and environmental issues rather than focusing on the more subjective ethical ‘people issues’.
It doesn’t necessarily (but can) exclude such screening criteria as tobacco and alcohol with the focus moving to a more forward-looking view summed up by the word ‘sustainability’.
In 1988 the World Commission on Environment and Development (WCED – a four letter abbreviation), chaired by Gro Harlem Brundtland, issued a report named ‘Our Common Future’ which defined Sustainable Development as:
“development that meets the needs of the present without compromising the ability of future generations to meet their own needs”
Please note the words ‘present’ and importantly ‘future’ in the sentence.
The report highlighted three fundamental components to sustainable development:
• environmental protection
• economic growth and
• social equity.
The concept of sustainable development focused attention on finding ways to promote economic and social advancement whilst also avoiding environmental degradation, over-exploitation or pollution, and replaced less productive debates about whether to prioritize development or the environment.
Or in other words – perhaps living (behaving, operating and/or investing) in a way that does not risk damaging the longer-term prospects or the ‘quality of life’.
So what does this mean in terms of investing?
In short, it means investing into companies that make decisions based not just on social or environmental factors but on both issues with a view to protecting the well-being of those that are (or may be) affected directly or indirectly today, in the present, or at some time in the future.
This is all well and good, but once you start exploring (or researching) this area you will come across a number of terms some of which are regularly referred to just by an acronym or as they are also known a TLA!
ESG – Environmental, Social and Governance. After SRI, ESG is the most common acronym. It refers to investment strategies which take into account environmental, social and governance related risks and opportunities as explained below.
Environmental concerns are often dominated by issues related to climate change.
Social issues relates mainly to the people i.e. employees & stakeholders (local communities for example) affected by a company’s activities.
Governance is more commonly referred to as Corporate Governance and a term used to refer to company management issues including board structure, remuneration, reporting as well as bribery/corruption issues. It indicates how the investor can engage with and encourage a company to adopt ‘best practice’.
EI – Ethical Investment is normally understood to relate to funds that apply negative or positive ethical screening i.e. they won’t invest in tobacco, gambling, armaments or pornography and, or positive criteria such as the S & G mentioned above.
CSR – Corporate Social Responsibility is the term used by companies to describe their ‘responsible’ response to external, often social, challenges they face including those in local (or not so local) communities. These may involve charity engagement whether actual or financial. It can also cover environmental impacts. Most companies have a transparent CSR policy.
II – Impact investing is a term often linked with philanthropic investors who invest directly into businesses where the social and/or societal impact is as important as the pure financial returns. They have enough wealth that the financial return is almost secondary. This discipline is somewhat different from SRI as it is more about measurable social benefits than SRI and ethical funds – but such investments should be viewed as such and not as charitable donations.
SEE – Social, Ethical and Environmental – a common acronym to describe the entire range of issues covered by SRI, green (a generic term used to describe investments which focus on environmental issues) and/or ethical investments.
Are Socially Responsible Investments right for you?
Investment is complex enough and trying to explain the opportunities and weakness of one specific area in an easily digestible format presents challenges of its own. SRI is not for everyone, but with the right approach and some guidance it can provide a more fulfilling strategy if you are keen to ensure that your portfolio better reflects your social and moral beliefs. For more information on how to invest contact us.