The regular investing route is pretty well-known and straightforward in its methodology. A cache of funds is pooled into an investment vehicle, and its content are then dispersed into a range of assets based on the preferences of the capital holders. Within those constraints, the fund would seek to maximize returns, usually not thinking about anything else.
Over the past decade, this has seen a shift with the rise of Socially Responsible Investing, or SRI. SRI is a way of investing that considers not just financial factors like the ones mentioned above, but also social factors as well as any specific goals of the capital holders which are usually non-monetary in nature. Personal Capital, one of the best rated personal finance apps, leads the industry in guiding investors through SRI methods. Check out this InvestorJunkie review of Personal Capital which explains more about how this industry leader helps guide its investors.
The Art of SRI
Like traditional investing, most times SRI will start with the pooling of investor funds in order to make large scale investments and to save on management fees through economies of scale. The differences start when the money is allocated. SRI does not just choose the most profitable ventures at a given risk level, instead aiming for a desired social outcome.
For example, quite a number of people have an intense concern for the well-being of the environment. In this instance, these investors might consider allocating investment funds only to industries and companies that are in line with the ideals of environmental awareness and conservation.
Even though the investment ventures are usually not the most profitable, these investors nonetheless feel accomplished with what they did simply because it is not all about the money. If their desired outcomes and aspirations are achieved with their investment ventures, they are more than willing to take a hit on their return rates.
At the end of the day, this trend seems to be poised to continue for the foreseeable future as a greater share of investable assets are invested with social responsibility in mind. Only time will tell how far this can go.
The Pros and Cons
The main benefit lies in giving investors a peace of mind. SRI-minded investors believe they are leaving a better world for their grandchildren by putting their money where their mouth is in the way they are. And that makes for quite the feel-good mood.
Another benefit would be that companies that otherwise would not have received investment now stand a chance at doing so. Companies that are not entirely focused on the bottom line, but are run by social entrepreneurs, stand to benefit greatly from this change in investor sentiment.
A potential drawback would come in the form of higher management fees. This is simply because SRI dollars (or euros) are invested more carefully as a result of more meticulous analyzing for obvious reasons. You simply need a larger team of analysts to not just ensure profitability, but also if the company in question falls in line with their investors’ vision.
Another drawback stemming from the higher fees is potentially lower rates of return. The greater the costs, the lower the profit margins. Luckily, this downside is not that much of an issue given that SRI-minded investors aren’t terribly concerned of maximizing their returns.
How to get Started
It used to be quite difficult finding investment funds or companies that applied social responsibility into their calculations, but with the rise of the internet and technology in general, investors are able to avail themselves ever more options to invest with their hearts.
The most common way is to put your money away in an SRI fund. Not only will you be able to invest with the comfort of knowing your money will be put to good use, but you will also benefit from the economies of scale natural to investment funds, so your causes get the most bang from your buck.
With the rise in technological development, we have also seen the rise of robo advisors that do not even require that you see an actual person to receive advise and investment recommendations. All you do is answer the questions designed to better provide recommendations, and choose whether or not to follow said advise.
Working Towards a Better Future
As more and more people around the world are having their basic survival needs safely fulfilled, they are turning increasingly towards social issues and using their discretionary income towards those ends. As the world becomes better off, so to it seems will be the demand for socially responsible investing not just on the individual, but with businesses as well.
The 21st century has already seen so many weird and wonderful developments that have served to enrich our lives and provide us with ever increasing comfort. It will be exciting to see what the next few decades have in store.