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Socially Responsible investing: which way is right for me?



Interest in ethical, or socially responsible, investing is on the rise. According to Investment Week, one sixth of UK consumers have started showing ethical and environmental concerns through the way they spend. Bearing that in mind, it makes sense that we’d see the same trend in investments.


Although these shifts may feel recent, the first ethical funds were actually created in the 1970s and the growth of ethical and sustainable interest has been heavily driven by both retail and charities. The UK has been one of the earliest governments to institutionalise this type of investing by requiring all UK pension funds to state their socially responsible investing (SRI) policy.


Since then, 59% of funds have incorporated SRI into their investment policies.


With all of that movement toward socially responsible, ethical, green investing, perhaps you have started considering it yourself. There’s a lot to think about, not least of which is ‘Which kind of investing is right for me?’


What is socially responsible investing?

Socially responsible investing (SRI) is the process of intentionally investing in businesses that make socially responsible and ethical decisions whether they are environmental and sustainable or people-orientated.


Benefits of SRI

For SRI investors, there are three clear benefits in utilising their portfolios this way. These tend to be:


Using what you have to make an impact

People interested in ethical investing enjoy using their existing funds to create mutually beneficial relationships between them and their investments. This kind of investing can make a real impact with funds that would be used in other ways in different circumstances.


Committing to your values

By engaging in SRI, you’ll have the opportunity to invest in companies and industries that align with your values. This can make the act of investing feel more fulfilling because you know that you are helping to build a world that is in line with what you’re passionate about.


Rewarding ethical business

Socially responsible investing is still investing. This means that by choosing to invest in, and trust in, ethical or socially responsible businesses, you are rewarding them for putting their best foot forward. Investment can be a huge deciding factor between making progress and becoming a good idea gone awry.


Who is this type of investing for?

SRI is for those who feel connected to their investments and want to use their investments to enhance and build their ideals. It’s for people who want to make their money not work just for them, but also for the world around them.

Some of the sectors or causes that are popular choices for investment are climate change, healthcare and human rights. You can choose to invest in companies that work within these industries or who maintain strong policies that support these causes.


What are the different types of SRI?

Different socially responsible investment fund styles refer to different levels of involvement and screening types (positive and negative) that you can apply to the fund and to your investment choices.


Positive screening describes choosing funds that support causes you care about. Meanwhile, negative screening is avoiding investing in businesses that do not uphold socially responsible values. These can include tobacco, armaments and mining companies, for example.


The different types of screening paired with varying levels of involvement from fund managers creates the differing types of funds. These are the main types of socially responsible investing:


Stewardship

What is it?

Fund managers practicing stewardship position themselves to be heavily involved in the businesses they invest in. Often they will meet with upper management and lobby for active, positive change.


These types of fund managers tend to see themselves as part-owners of the companies and take responsibility for the companies, making ethical and sustainable choices.


Who is it for?

This type of investing is for individuals who want to invest in an ethical and socially responsible way and who want their fund managers to actively encourage positive changes.


ESG integrated funds

What is it?

This type of fund looks primarily at investing in businesses with the strongest prospects, but does still take ESG (ethical, social, and governance) factors into account. These types of funds use ESG factors to better understand the long-term performance of a company.


It’s one of the more flexible types of SRI available.


Who is it for?

These funds are for those who want to engage in socially responsible investing, but aren’t interested in imposing specific restrictions on the businesses.


This could also be a good choice for those who believe that these types of organisations will perform strongly, but they are not necessarily interested in their investment choices being restricted to SRI.


Exclusions

What is it?

This type of fund primarily relies on ‘negative’ screening which removes businesses that don’t fit moral requirements from the possibility of investment. The specific exclusions will, of course, differ from fund to fund, so you should make sure that you understand the details of what you may be investing in.


Who is it for?

Exclusion-based investing often fits best with those who want to avoid investing in certain sectors or businesses for ethical, religious, or values-based reasons. It’s important to understand that these types of funds may behave differently to funds that operate without these constraints.


Sustainability focus and impact investing

What is it?

Sustainability-focused funds invest in companies that are making stronger sustainable choices and are likely better positioned as the trend toward sustainably-minded consumers grows. These funds don’t necessarily rule out any particular industries or companies, but do usually have a requirement to meet certain sustainability-based criteria.


Impact funds, on the other hand, take that criteria to another level. These funds require businesses to measure and report on the environmental and social impact that they intend to make. This can be anything from reducing their carbon footprint by a particular amount or saving a specific volume of water. Investing this way gives your money a direct and measurable impact.


Who is it for?

These investments are for individuals who want to know that their money is going toward something good and who want exposure to long-term growth themes.


Tracker funds

What is it?

These types of funds can be set up with many different approaches. Some will work from exclusions to keep from investing in sectors that don’t fit their values, while others will work by tracking indexes like the FTSE4Good or the FTSE All-share and screening their investments based on how well companies meet their morals-based criteria.


Who is it for?

Tracker funds are likely to be a good fit for those who are interested in socially responsible investing and who want to start with a simple, easy-to-understand, low-cost fund.


Shares

What is it?

Sometimes it can be difficult to find existing funds that directly match your values. If, after doing your research, you find this to be the case, purchasing shares and investing directly with a company may be an option for you. This method of SRI puts you in direct control over where your money is invested and can help you make sure that it goes to the businesses you feel best represent your values.


Who is it for?

This type of selective investing is often suited to those who want to know exactly where their investments have gone or who have a specific set of criteria they want upheld, but cannot find in a pre-existing fund.



Whether the types of investment explained here are calling to you or not, it seems that socially responsible investing is on the increase at the moment. If you find yourself curious about SRI or are interested in the different options for investing in line with your values, don’t hesitate to get in touch.


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