When you invest funds, you are preparing for your retirement and your future. But at the same time, you may also want to consider the impact your money has on the world. Ethical investment strategies seek to balance these two concepts. If you want to foster the social changes that are important to you, while also nailing down a solid investment strategy that keeps your long-term financial goals in mind, you may want to check out the following essentials.
What Is Socially Responsible Investing?
Socially responsible investing (SRI) allows your ethics to guide parts of your investment strategy. You make decisions based on your beliefs about the world. For instance, some people avoid certain industries such as oil and gas. Others don't invest in companies that do stem cell research or don't pay employees a living wage.
Note these are just examples of some of the types of factors people consider when thinking about SRI. As everyone's social, ethical, and religious world views differ, so too do their SRI principles.
In most cases, this strategy does not focus on a proactive approach to investment. Instead SRI investing screens out certain types of investments. Typically, SRI also looks at social principles separately from financial elements, but of course, the investor ultimately takes both into account.
How Does Investing Based on ESG Principles Work?
In contrast, investing based on ethical, social, and governance (ESG) principles considers both financial and ethical elements of investment opportunities. Rather than screening out certain investments, an ESG strategy looks for investments that meet certain criteria.
Although the exact approach may vary between financial professionals, this strategy typically starts with the financial professional selecting a number of investments based on traditional financial markers of success. Then, they go through the list, identifying companies or opportunities that meet certain ESG criteria. Often, financial professionals quantify these criteria, and they assign each investment a score. They don't necessarily avoid investments that don't score over a certain threshold, but they take a closer look at those opportunities before including them in the portfolio.
Combining SRI and ESG in Your Investment Strategies
Ideally, you may want to combine elements of both SRI and ESG principles in your investment strategy. ESG principles attempt to help you find investments that meet both social and financial guidelines. Then, once you've identified potential investments, you may want to use SRI to screen out opportunities that don't work based on your own ethical principles.
For example, if you're working with a financial company that has a set of ESG principles in place, they show you how lucrative an investment appears based on financial elements and through their ESG lens.
Then, to ensure that the investments meet your personal ethics, they narrow down the list even further based on your ethical specifications.
To learn more about balancing ethics and quality financial moves, consider reaching out to a financial professional to talk about your goals today.
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Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Please keep in mind, the return on values based investments may be lower than if you make decisions based solely on investment considerations.
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