Socially responsible investment

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what exactly is socially responsible investment?

Socially responsible investment (SRI) combines the social, ethical and environmental considerations of the investor with their financial objectives. In general terms ethical or socially responsible investment seeks to invest in companies which make a positive contribution to the world and seeks to avoid companies which harm society or the environment. Therefore, on the surface, defining SRI might seem a no-brainer for anyone with a modicum of social conscience, but this masks a number of complexities:


1. Different approaches to SRI - It can be difficult for an individual investor to judge whether a company is socially responsible or not. As a result, most ethical investing is done through a managed investment fund such as a unit trust or pension fund or life insurance. There are funds which take a 'negative screening' approach, merely excluding investment in specific sectors such as gambling, armaments, alcohol or tobacco. Other funds take a more pro-active stance and in addition employ 'positive screening', actively seeking to invest in companies involved in socially or environmentally progressive businesses. A third way, sometimes called 'engagement' or 'best of sector' or 'active shareholding' evolved in the late 1990s. Here, rather than applying screening criteria to investment choices, the fund manager creates a dialogue with companies in their portfolio and uses his or her power as a shareholder to push for change and the adoption of ethical business practices. Some funds use a mixture of these approaches. 'Cause-based' investing is a much narrower approach which enables investors to support a particular cause or activity such as organic farming or regeneration of disadvantaged communities.

2. The subjectivity of personal values - Different people have different ideas of what is 'ethical' and to cater for this SRI funds can differ greatly in their objectives. For example the classification of 'human rights' as good but defence/weapons companies as 'bad' is an ambiguous issue. Some would argue that blindly embracing pacifism isn't the best solution for achieving peace and point to historical examples such as the rise of the Nazis to support their point. Screening out companies involved in alcohol, one of the traditional 'sin' categories, doesn't reflect the reality of how many people now live. And it also results in excluding some very progressive companies. For example Whitbread plc makes beer, but for decades its has regularly contributed more than 1% of its pre-tax profits to charity, been involved in community projects and has a reputation for generous wage and benefit packages. There are other contradictions: some funds filter out companies that support abortion rights while other funds actively screen them in. These differences in what constitutes 'social responsibility' can also be seen on an international level. For example, in Canada, where resource companies make up more than 40% of the Toronto Stock Exchange, ethical investors have had to rethink US screening criteria that often exclude 'messy' industries such as timber, paper products, mining and oil production.


The adoption of an SRI 'best of sector' approach in Canada means many of these firms have pioneered environmental programmes while offering well paid jobs in a difficult economy. In 1991 in South Africa, black trade unions surveyed members on how to invest their $175 million pension fund, The Community Growth Fund. Rather on relying on 'ethical' categories popular in North America and the UK, such as animal testing, alcohol and tobacco, the Community Growth Fund's most important criteria are product quality, jobs, working conditions, safety, benefits and equal opportunity. The unions felt that the creation of well paying jobs is the greatest need in the South African economy and worker-related issues make up more than 75% of the screening criteria.


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