Socially responsible investment (SRI) can be defined broadly as an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis. SRI funds aim to integrate personal, social and environmental concerns with financial considerations, their objective is to increase investors’ wealth while ensuring that the selected companies have a positive impact on people and the Planet. Often called ethical investments or sustainable investments, this type of investment has become increasingly popular in recent years.
The early stages of the SRI movement can be traced back to the nineteenth century, especially amongst religious movements such as the Quakers and Methodists. Specifically, these groups excluded investments that would go against their beliefs. Such non-financial ‘exclusionary’ behavior in investment choice became a highlight in 1960s during the Vietnam War, where funds like the PAX World Fund was set up with a mission to avoid any investments that derive profits from weapons production. Another milestone moment for SRI occurred in the 1980s — investors who were against the apartheid regime in South excluded any investments in South Africa. Moreover in 2006 the United Nations Global Compact and the UN Environment Programme Finance Initiative lunched, at the New York Stock Exchange, the Principles for Responsible Investment, an initiative that aim to connect pension funds and money managers from around the world to commit to principles of responsible investment.
SRI Funds demand their investments to be in an ethical way and in ethical sectors of economy. Usually SRI Mutual Funds are not involved with alcohol, gambling, tobacco and weapons production or distribution. Beyond that they pursue to have good performance is areas of welfare, board diversity, community relations, corporate governance, environment, human rights, indigenous peoples right, product safety and impact, and workplace practices.
A different kind of responsible investment is the so-called Morally Responsible Investing (MRI). These are faith-based funds that invest in companies whose products and policies are consistent with the investor’s religious (usually moral) beliefs. There are basically two types of MRI funds, the Islamic Mutual Funds and the Christian Funds. Both are based on the religion and their investment is more focused on ethical (each in its own perception) field of investing and less on social or environmental contribution. That is the major difference with the “common” SRI funds.
Screening in SRI Funds
The most common factor that distinguishes a SRI fund from a non-SRI or conventional fund is the use of social criteria as part of the portfolio construction process. SRI means only that non-financial criteria are part of the selection process for choosing investments. When creating a socially responsible portfolio, a fund manager first analyses the entire universe of investments against non-financial criteria to establish a subset of investments that are acceptable in terms of investors’ ethical, social, religious or other preferences. In the SRI industry, these non-financial criteria are referred to as screens.
Investment screens generally fall into either one of two categories — positive or negative screens. Negative screens can be thought as avoidance or exclusionary screening. The most popular examples of negative screens include tobacco, alcohol, gambling or weapons, most of which are associated with the traditional type of screening against ‘sin’ industries.
On the other hand, positive or inclusionary screens aim to select shares that meet superior corporate social responsibility (CSR) standards. This can be thought of as ‘best-in-class’ in terms of performance in a particular social cause. Most popular examples of positive screens relate to issues about the environmental sustainability, human rights advocacy and community involvement. Today, it is most common for funds to use a combination of both positive and negative screens.