Socially responsible investment – are they really an option for individual investors?

Investors are looking for highest returns possible when choosing investment opportunities and it is becoming easier to purchase shares individually, without going through a third party broker. This has increased the opportunities for individual investors, as previously many of them would have not invested due to having to go through a third-party. This change in availability has increased the number of potential investors, along with reducing barriers to entry for small investors.

Investors today are becoming more socially aware and some only wish to invest in companies they view as being socially responsible. Can investors afford to pick and choose investments? Or should they just be focused on the returns. Companies have to declare what they are doing in terms of being socially responsible, is this a waste of resources for them and taking them away from their primary objective of increasing shareholder value?

What is Socially Responsible Investment?

The idea of socially responsible investments (SRI) has been around for many years, with the origins being drawn back to the Quakers and Methodists, and even earlier. The beginning of SRI was rooted in religious ideas to define what was right or wrong.

Renneborg et al (2008) define SRI as ‘an investment process that integrates social, environmental and ethical considerations into investment making decisions’. The definition of SRI has developed since its beginnings and moved away from religious factors.

The meaning of SRI will be different depending on individual views and beliefs. For example some investors may only want to avoid weapons companies, whereas other investors may have a longer set of investment criteria. Individual investors tend to have a larger amount of criteria than institutional investors.

UKSIF (The Sustainable Investment and Finance Association) promote ‘responsible investment and other forms of finance that support sustainable economic development, enhance quality of life and safeguard the environment’. They provide help for consumers wishing to make socially responsible investments with a list of companies who are ‘members’ of UKSIF and provide SRI opportunities. This helps to promote SRI along with making it an opportunity for all investors to get involved in, regardless of whether they are core or broad investors.

There have been many empirical studies to investigate if SRI provides lower returns than other investments, due to the smaller number of SRI investment opportunities. There has been no real link between SRI and low returns.

Therefore, I believe that SRI is a good thing as investors are able to choose investment opportunities which fit their beliefs and values and are able to make a real difference to the way businesses operate. The power of SRI can be seen through the requirements that have been in place in many countries since 2000 and require companies to explain what they are doing to promote SRI if any. This has shown that socially responsible investments are clearly very important to a range of investors.

In terms of companies having to produce SRI and reports, I believe that they are also important as through producing these reports and explicitly stating what they are doing, they are increasing the number of potential investors, which in terms leads to increased funds for development. As there is no link between SRI and reduced returns, for me personally, SRI is definitely something that I would consider in the future.

(Sources – Reeneborg et al (2008), UKSIF, http://www.neiw.org)