Socially Responsible Investment (SRI)
It allows investors to integrate variables not considered in the financial models and investment process by reflecting their values in the choice of their investments or incorporating political criteria in the management of investment portfolios.
What Is a Socially Responsible Investment (SRI)?
The SRI allows investors to integrate variables not considered in the financial models and investment process by reflecting their values in the choice of their investments or incorporating political criteria in the management of investment portfolios.
The basis of SRI is that environmental, social, and corporate governance factors can improve financial results, improve risk analysis, and, therefore, be integrated into investment analysis and asset selection.
The origin of socially responsible investments or finances is linked to motivations of a moral or religious nature.
Thus, in the 1950s, some religious groups, such as the Quakers, began to apply investment policies that discriminated against activities such as the production of tobacco and alcohol and those linked to the gaming industry, which according to their ideas, damaged the moral fabric of society.
Later, during the Vietnam War, activist groups discovered that investment could be an important instrument of pressure against companies that used the apartheid policy practiced by the South African government.
Linked to the rejection of these two events, this investment arises through collective investment institutions that promote the first socially responsible fund.
For example, the Pax World Fund was created in the United States in 1968 and excluded companies linked to producing weapons and military supplies from its portfolio.
Also, many investors decided not to invest in companies doing business in South Africa, reducing the number of North American companies investing directly in this country.
This investment filter is currently aimed at rejecting investments in countries with totalitarian political regimes, such as Sudan or Myanmar.
Europe was a pioneer in creating and commercializing socially responsible investment funds. In 1965, the opinion forum Ansvar Aktiefond Sverige launched the first ethical investment fund in Sweden.
The first ethical fund in the United Kingdom –Friends Provident Stewardship– was launched in 1984. This investment market was more mature in the United Kingdom, while in Sweden, there was a higher percentage of ethical investment per habitant.
Thus, in the early stages of SRI development, most projects were conceived based on negative pre-selection criteria, such as the exclusion of the alcohol industry, pornography, etc.
A Brief History of Socially Responsible Investment
Subsequently, the evolution of the SRI concept led to the replacement of the exclusion of certain activities by including "model" companies protected under the concept of positive discrimination.
The evolution of the decision criteria for socially responsible investments has given rise to different methodologies for pre-selecting companies and, consequently, to different degrees of maturity of SRI, which allows us to speak of different generations of funds.
SRI and sustainable stock indices coexist together, observing a new concept of SRI in which, when selecting a company, how it carries out its activity has greater relevance than the own activity developed.
Filters (screening) apply social, moral, environmental, or ethical criteria in investment decisions on conventional instruments (shares, investment funds, etc.).
Generally, it is divided into negative criteria, which exclude certain investments, and positive criteria, which aim to select those with the best performance.
Shareholder activism entails recourse to dialogue with the company management team, one of the fundamental rights of all shareholders: to participate as a co-owner in company decision-making through their right to vote.
Social investment in the community (community Investing) generates financing for individuals or groups belonging to the community where the institution operates, intending to support a certain productive activity that presents advantageous characteristics from the social point of view and environmental.
Community investing through collective investment schemes is the fastest-growing field in the United States and tends to expand through the creation of new products and services.
Thus, SRI can have different interpretations that range from more restrictive visions of exclusion to visions that go further and seek to integrate all the risk factors into valuation models through the explicit introduction of social.
SRI Segmentations & Cross-Cultural Challenges
SRI strategies can also be grouped, following Eurosif, into two large SRI segmentations based on the evolution shown in recent years:
-
Central SRI (core): Covers negative filters and positive screening, including best-in-class and selecting pioneers or thematic investment.
-
Broad SRI: Covers strict SRI and includes things based on simple exclusions, including simple screening regarding standards, investor dialogue (engagement), and integration.
One of the main challenges lies in the complicated transfer of concepts, principles, and values from one economic system and culture to another.
The reason is that the foundation of every cultural and economic system is completely different. There are almost no holding points between them to make a transfer of these concepts, principles, and values.
This implies that the scrutiny criteria chosen between one and the other differ significantly without direct correspondence.
Financial instruments in the ISR market
One of the stages of the investment process goes through the choice of the financial instrument (product), which will channel the savings toward the SRI. As we have shown, on the one hand, there are different SRI strategies and, on the other, different degrees of social commitment.
The combination allows for a wide range of socially responsible financial instruments.
The type of SRI instruments will depend on the financial intermediary – formal institutions and organized financial markets or non-formal financial institutions – and the objective that the product intends to cover regarding sustainability.
Developed countries' most widespread investment products are those traded on organized markets.
Many socially responsible investments are channeled today through Collective Investment Institutions (CIIs), such as mutual funds, investment companies, and pension funds.
Socially responsible investment and pension funds (FISR) are collective investment institutions that capture the savings of many investors (individuals, companies, and other entities) to invest them jointly in different assets.
Such as shares, public, and private fixed income or derivatives, and structured products, to direct savings towards companies and organizations that, following the fund's ideology, carry out some SRI strategy.
Complying with the evaluative and negative criteria reflected in it allows socially responsible investment strategies to be carried out actively (activism or investment in the community).
The evolution of these socially responsible investment or pension funds has gone hand in hand with developing socially responsible investment strategies.
Different Generations of SRI
Different generations of socially responsible investment and pension funds coexist, ranging from first-generation FISRs, which apply exclusionary filters in the pre-selection of assets.
Fifth-generation ones carry out shareholder activism and investment strategies in the community, and even collective investment institutions carry out all socially responsible investment strategies through a fund.
The purpose of investment in SRI is very broad, ranging from promoting products that allow investors to be channeled towards financing mechanisms for cooperation projects or companies that contribute to the growth of developing countries (PVDs ).
Organizations that work in the social economy in the most developed countries participate in the shareholding of socially responsible companies and organizations, either through direct investment or through investment mechanisms in organized financial markets.
Thus, other instruments on the market, such as revolving funds, are the most common microfinancing mechanism in developing countries.
Guarantee funds that support obtaining credit by excluded groups:
- Investment in funds for micro-credits
- Venture capital or solidarity
- Socially responsible for current accounts and deposits
All these products can be marketed through the so-called Ethical Banking and traditional banking.
The difference between the two lies fundamentally in the scope of this type of product over the total of its offer.
In ethical banking, the entire financial intermediation offer is governed by sustainability parameters, while in traditional banking, social and environmental considerations are only applied to certain product designs.
Socially responsible stock indices and rating agencies
The socially responsible indices are indicators of the evolution of the prices of the most representative titles of the SRI market segment. The elaboration methodology depends on the institution that designs, manages, and publishes it.
The creation and increase in several indices is a good example of the development of SRI, as they serve as a reference for private investors, managers, and investment companies that put SRI funds into circulation on the market.
Similarly to credit rating or credit rating entities, social rating agencies assess companies' social responsibility through research methodologies and are not accessible to the market. Normally, the results of the investigation are structured in databases that are commercialized in the financial market.
These agencies offer investors.
- Products and services, such as databases, benchmarks, sectoral documents, comparative fund services
- Total analysis of risks, traditionally not considered financial advice
- Managers in socially responsible investment
- And country sustainability rating, in addition to serving as consultants
The world market for socially responsible investment
The financial market for socially responsible investment has also followed the same behavioral development pattern. First, it emerged in the US from religious movements and, later, from ethical movements.
Later it was transferred to Europe, where there was a great boost with the creation of a voluntary standard by the London Stock Exchange, in which pension funds were requested to report on what social and environmental criteria they had for the time to make their investments.
Later it moved to other countries, such as
- Germany
- Netherlands
- Denmark
- Sweden
- China
- Switzerland
- Canada
- Australia
- South Africa
- Italy
- Spain
European nations, particularly those in the north, are at the forefront of SRI usage. Given these countries have consistently been at the forefront of this field, this is partly expected.
However, in the market capitalization of SRIs with a sustainability focus in particular European nations as of 2017. For example, Italy was the largest sustainability-related SRI investment market that year, with invested assets totaling approximately 53 billion euros.
SRI Development prospects
The financial crisis that has occurred in the markets since the middle of 2007 has led to a financial and real economic crisis, with no sign of ending and consequences that neither the great analysts nor advisers dare to forecast.
Its origin can be attributed to the absence of an adequate assessment of the risks inherent in the financial and structured products that investment banks were marketing.
This, together with the lack of transparency in the system and the lack of a financial culture of most market players, generated an illusion of well-being and wealth that did not correspond to the real situation.
The assumption by all market operators of the comprehensive risk assessment methodology that investment with sustainability criteria or ISR is developing is a good starting point to restore confidence in the market.
Transparency and an increase in a financial culture that values decision-making under sustainability parameters will mean new developments in financial markets and intermediation structures.
Conclusion
Earning money matters, but it also matters that this money is not based on labor exploitation or arms sales. The fact that it can help protect the environment or encourage overcoming social inequalities attracts investors.
The growing demand for ethical funds is a thermometer that shows us the interests of certain sectors of society and the financial community.
The SRIs reflect that the economy does not have to be divorced from the ethical and legitimate aspirations of a better world for all.
SRIs have proven profitable and more resistant to changes and fluctuations in the financial market. So this is an added value that, little by little, they are gaining popularity among individual investors and large institutional funds.
Despite this enormous potential, there is still a long way to go for STIs to consolidate their position as the option many investors have been looking for.
For this, it is important to underline the conviction that investing in SRI is not an act of charity. But, still, a rational decision in all senses: not only is profitability achieved and profits maximized but also a fairer and healthier world is promoted.
A cocktail of advantages that can hardly go unnoticed by the most diligent investors.
The SRIs are tracing a new path in the financial field. For this reason, the processes they assume must be ethically defined, from the creation of the fund and its structure to its daily operation.
SRIs should be advantageously viewed as instruments differentiated from other types of funds.
In short, the commitment to SRI will result in the revaluation of financial entities, often stigmatized. But on the other hand, it will give them the opportunity and the satisfaction of being seen as drivers of change for the common good.
or Want to Sign up with your social account?