The Dynamic Sphere of Socially Responsible Investment and ESG

Socially responsible investment is where you invest money in a business based on their behavior and how ethical they are. You can support organizations that engage in racial justice, women empowerment, green energy, etc. On the other hand, you can avoid investing in companies that encourage dark money dealings, prison profiteering, irresponsible disposal of waste, etc. In 2006, PRI announced that social, environmental, and governance figures are mandatory aspects of corporate financial analysis.

You can check on websites such as Light Money that provide authentic SRI and ESG information about various companies. This way, you can make better choices regarding the companies suitable for investing. Moreover, you can support organizations that follow ethical practices by investing in ESG Index funds, ESG mutual funds, etc.

Importance of Socially Responsible Investment

a)     Impact on investor’s life -  U.S. News and World Report issued one such research paper that showed engagement in supporting noble causes releases "happy" chemicals like dopamine, oxytocin, and endorphins.

b)    Impact on the planet - It does not take formal education to understand that we are at a juncture with climatic disasters. Hence, nations need to work towards reducing their carbon footprint. The mega-corporations are the ones that usually resist switching to environmentally friendly practices. Therefore, by practicing responsible investment, you will be withdrawing resources from organizations that are not adhering to eco-friendly practices.

c)     Employee motivation - Studies suggest that 64% of millennial employees avoid working in a company that does not adhere to sustainability policies and social responsibilities. Furthermore, research published by Marsh McLennan showed that companies with the highest employee satisfaction fulfill ESG criteria.

d)    Legal and Regulatory benefits - Additionally, the law regulators perceive companies with ascertainable ESG goals as more responsible. Obviously, getting in trouble with the law is bad for business. Legal fees can do a number on an irresponsible company's bottom line.

e)     Guaranteed growth - Global Sustainability Study 2021 suggests that around 85% of consumers are inclined to spend more on sustainable products & services. A study by McKinsey showed that ESG propositions had only 8% negative findings. Meanwhile, the positive results on equity returns mounted up to 63%.

f)      Reduction in operating costs - McKinsey's analysis suggests that ESG policies can impact operating profits at 60%. Recycling or reusing the waste from manufacturing units, reducing water consumption, etc., are helping companies to save billions of dollars in the long run.

Is Responsible Investment profitable?

Usually, people think that responsible investment is a synonym for diminishing returns. Well, it is nothing more than a misconception. Instead, socially responsible investments can get you equal or even more returns than conventional investments. Several ETFs and mutual funds hold on to the ESG criteria. Some websites outline more than 100 ETFs and socially responsible mutual funds. According to Responsible Investment Associations, socially responsible investments would also outclass the overall market in U.S. and global equity categories.

Besides, a survey done by Mackenzie Investments suggests that this profitability could mount up to 40%. Since its commencement, the MSCI ACWI Sustainable Impact Index has outclassed the MSCI ACWI World Index by a surplus of 4% in average annual returns. Generally, people end up deciding based on short-term figures. On the contrary, short–term figures can be misleading. Andrew Winston says that the last two years have witnessed a money rush of more than 1 trillion USD in the ESG mutual funds. Hence, paying for our shared future is profitable.

Difference between ESG & Responsible Investment

These two strategies overlap, but they are two different investment strategies. Let us have a look at a few of them.

·      In socially responsible investment, investors do divestment, reinvestment, screening, etc., to accomplish constructive social and environmental outcomes. On the contrary, ESG is a metric that helps to measure a company's threats beyond the financial framework. The latter does not rule out a company because it does not adhere to eco-friendly practices. Instead, it considers the organization’s strategy for responsible corporate operations.

·      In socially responsible investing, the primary focus is on principles. As a result, the investments are guided by ethical values. On the contrary, ESG investments are driven by long-term sustainability/renewable factors to pick companies with more significant potential.

Finding out if a company is sustainable

Here are a few points you should consider for determining the sustainability of an organization.

·      As per the analysis of Forbes, 94% of customers consider excising brand loyalty to transparent organizations. Hence, the details of the company's manufacturing process, products, financial activities, etc., should be available to the public. E.g., some organizations release their annual sustainability reports.

·      It would help to consider whether the organization possesses third-party certification for sustainable activities. For example, B Corp certifications prove that a company adheres to social and environmental policies.

·      For example, while investing in a textile company, you should investigate what dyes or fabrics they use. Synthetic fibers harm the environment when they end up in landfills, and chemical dyes discharge toxins.

·      Some brands adopt eco-friendly packaging solutions to avoid pollution through solid waste. Such practices also reduce carbon footprint.

Dianna Burkholder came up with a vision with the name Light Money. She realized there should be a reliable source for researching a company's ethics. This website is helpful for both ESG as well as SRI investors.