Doing good for the world can be good for you, too. If you care about social and environmental issues, Socially Responsible Investing* is a way for you to put your money where your mouth is and see your investments perform better over time.
Socially Responsible Investing (SRI) started as a way to invest according to your personal values, but it also offers built-in risk management benefits that traditional investing can’t match.
Today, SRI is not just a niche form of investing. In fact, responsible investments in Canada were valued at$3.2 trillion in 2019, according to research from the Responsible Investment Association. This means that more than half (61.8%) of all Canadian assets under management are in responsible investments, and that’s up from 50.6% in 2017, with growth expected to continue.
What is socially responsible investing?
Essentially, SRI involves screening for Environmental, Social and Governance (ESG) factors before buying stocks, bonds and other assets. By considering environmental issues like climate change and water scarcity, social issues like gender inequality and corporate governance* issues like board diversity, investors can support causes they care about through their investments.
The assets in an SRI portfolio or SRI fund can vary greatly depending on the screening strategy of the firm or individual who is managing those investments.
We designed the Moka SRI Fund around the values of Canadian millennials, who are the majority of our users. The companies in this fund may change, but they are always selected for supporting four key issues of environmental protection, sustainable development*, gender diversity in corporate leadership and corporate responsibility.
Can SRI improve the performance of your portfolio?
In the past, analysts often associated SRI with lower returns, but research, including a large research review, indicates that the performance of SRI can actually exceed regular investing for one fundamental reason: companies that consider ESG factors reduce risk in the long term.
Now if you think taking care of the environment or promoting equality can be costly for a company and ultimately lead to lower gains for an investor, it may be because you’re not looking far enough ahead.
Why is SRI smart?
Let’s imagine there are two factories that make boxes. We’ll call them BetterBox and BigBadBox and assume that they enjoy similar market share and sales trajectories.
BigBadBox doesn’t pay its workers a living wage. It is illegally dumping manufacturing waste in a river. Plus, the machinery is old and doesn’t meet safety regulations.
At BetterBox, company employees enjoy competitive salaries and comprehensive benefits. They make boxes with 80% recycled materials in a recently updated factory that uses solar energy.
Which company seems like the better investment? Is BigBadBox really poised for long-term success?
What if their employees go on strike for a fair wage and halt production for a month? What if an employee is injured on the old machinery and sues for damages? What if the government finds out the company is polluting the river and imposes a huge fine? What if the river pollution gets into the drinking water of a nearby community? What if the media picks up on the story and it goes viral? Would customers stop buying the boxes from BigBadBox? Would investors start unloading BigBadBox stock? Would the stock price plummet?
By taking the socially responsible approach today, a company like BetterBox can actually manage risk in variety of ways. By respecting the environment and employees, BetterBox can avoid expensive legal, regulatory or divestment costs. By building better relationships with customers and shareholders, BetterBox can establish a reputation as a smart investment.
What’s more, since the demand for SRI is still growing, socially responsible companies (like our imaginary example BetterBox) are becoming more and more attractive to investors. Ultimately, that means that Canadians who invest in SRI today stand to benefit in the future.
SRI is not only a way to help the world, it’s also a smart way to invest, period.
Socially Responsible Investing is any investing strategy that is designed to balance personal financial gain with larger social and environmental good. The term SRI is sometimes used interchangeably with ethical investing, sustainable investing and green investing, but they all seek to make a positive impact on the world.
Sustainable development is an approach to economic development that aims to balance present and future needs by not using up the world’s natural resources.
Corporate governance is the manner in which a company manages leadership, plans for action, and internal controls, like accounting transparency and ethical business practices including how they handle executive compensation, corruption, bribery, reporting on breaches, board diversity, and crisis management.
Disclaimer: The views expressed in this story do not constitute financial advice. Please speak with your Moka portfolio manager to find out if SRI is the right option for you.