Socially Responsible Investing

What is SRI? (Socially Responsible Investing)

In the modern investment world, there are many options that are available to an investor. One of the widely acceptable and growing trends has been Socially Responsible Investing. There are two inherent goals of socially responsible investing: social impact and financial gain. The two do not necessarily have to go hand in hand; just because an investment touts itself as socially responsible doesn’t mean that it will provide investors with a good return. Similarly, the promise of a good return is far from an assurance that the nature of the company involved is socially conscious. An investor must still assess the financial outlook of the investment while trying to gauge its social value. SRI is one of the options that have been in quite a limelight in the recent times.

It is often called as ethical and green investing. It avoids industries such as tobacco, alcohol, gambling, weapons and plastic. Instead, SRI involves investing in companies engaged in ethical and social responsible themes. Environmental sustainability, clean technology or alternative energy, social justice are only few of the many options available.


How does SRI work?

Socially responsible investing considers environmental, social and corporate governance, also known as ESG criteria. These criteria help many socially responsible investors decide which companies or funds to invest in. This includes companies that respect the environment, treat their employees and suppliers fairly and promote ethical policies. Some investors believe that companies that practice good citizenship can yield greater returns than those that don’t.

SRI works the same way as any other style of investing. But SRI adds company ethics and social responsibility into the equation, instead of simply putting your money into securities for growth, SRI tends to follow political and social trends. Women’s rights, civil rights and anti-war efforts had been the key focus areas for Socially Responsible Investing in the past. Now, socially responsible investors’ focus has shifted to mostly sustainable solutions to 21st century challenges. This includes climate change and ethical business practices.


Investment Firms Practicing SRI

It isn’t always easy to determine which investments are strictly socially responsible. For instance, a company could practice ethical manufacturing processes, only to dispose of waste in an irresponsible way. Some companies boast that they support female empowerment, but don’t have any women on their board. It’s important to do your homework to be sure you’re investing in actually socially responsible institutions.

If you need some help figuring out which companies to invest in, an investment firm can come in handy. When you work with an investment firm, they’ll manage your portfolio for you, investing in truly ethical companies. Some names to start your investment firm search in the United States include Calvert Research and Management, Parnassus Investments, Oakmark Funds and SRI Investing. You may also want to check out the robo-advisor Swell Investing which focuses solely on impact investing.

Each firm has different impact strategies to find its clients financially healthy and rewarding investments. They pride themselves in contributing to the world while turning a profit. You could also turn to a financial advisor to help you get started or scale up your SRI investing. It helps to do some digging to find out which advisors will be the best fit for your financial goals, risk profile and principles.


Example of Socially Responsible Investing

One example of socially responsible investing is community investing. It goes directly toward organizations that both have a track record of social responsibility through: helping the community, and have been unable to garner funds from other sources such as banks and financial institutions. The funds allow these organizations to provide services to their communities, such as affordable housing and loans. The goal is to improve the quality of the community by reducing its dependency on government assistance. This in turn has a positive impact on the community’s economy.


ESG Investing and Analysis

What is ESG Investing?

ESG stands for Environmental, Social, and Governance. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities.

There are several different categories of sustainable investing. They include impact investing, socially responsible investing (SRI), ESG and values-based investing. Another school of thought puts ESG under the umbrella term of SRI. Under SRI are ethical investing, ESG investing and impact investing. The Financial Times Lexicon defines ESG as “a generic term used in capital markets and used by investors to evaluate corporate behavior and to determine the future financial performance of companies.” It is used by investors to evaluate corporations and determine the future financial performance of companies. It adds that ESG “are a subset of non-financial performance indicators which include sustainable, ethical and corporate governance issues such as managing a company’s carbon footprint and ensuring there are systems in place to ensure accountability.” They are factors in investment considerations, used in risk assessment strategies incorporated into both investment decisions and risk management processes.

ESG metrics are not commonly part of mandatory financial reporting, though companies are increasingly making disclosures in their annual report or in a standalone sustainability report. Numerous institutions, such as the Sustainable Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and CDP are working to form standards and define materiality to facilitate incorporation of these factors into the investment process.


ESG Factors

There is no one exhaustive list of ESG examples. The following table shows an inclusive list of various Environmental, Social and Corporate Governance factors that the investors look for before making a decision about their investments.

These ESG examples can often be measured (e.g., what the employee turnover for a company is), but it can be difficult to assign them a monetary value (e.g., what the cost of employee turnover for a company is).


Conservation of the Natural WorldConsideration of people and RelationshipsStandards for running a company
Climate change and carbon emissionsCustomer SatisfactionBoard Composition
Air and water pollutionData Protection and privacyAudit committee structure
BiodiversityGender and diversityBribery and corruption
DeforestationEmployee engagementExecutive Compensation
Energy EfficiencyCommunity relationsLobbying
Waste ManagementHuman RightsPolitical Contributions
Water scarcityLabor StandardsWhistleblower Schemes


What is the Appeal of ESG Investing?

Financial Outcome is not the sole criteria for every investor. Some investors are also interested in the impact of their investments and and the role their assets can have in promoting global issues such as climate action. This is particularly the case with millennials as ESG funds have been a major interest of this demographic.

According to a 2006 study called Cone Millennial Cause Study, millennials are more likely to trust a company or purchase a company’s products when the company has a reputation of being socially or environmentally responsible. Half of those surveyed are more likely to turn down a product or service from a company perceived to be socially or environmentally irresponsible.



ESG investing grew out of investment philosophies such as Socially Responsible Investing (SRI), but there are key differences. Earlier models typically use value judgments and negative screening to decide which companies to invest in. ESG investing and analysis, on the other hand, looks at finding value in companies—not simply at supporting a set of values.

SRI uses exclusionary filters to keep companies out of portfolios that don’t meet certain criteria, while ESG opts-in to companies that are making positive impacts in the three factor areas.

Socially Responsible Investing (SRI) started in the 1970s as investors mostly used negative screening methods to exclude investments in guns, tobacco, gambling, adult entertainment and other vices while ESG investing, though sometimes considered synonymous with SRI, is its own class of investing. ESG investing is the integration of environmental, social and governance factors into the fundamental investment process. Using ESG factors or an ESG framework, investors can select companies in which to invest. ESG factors such as environmental friendliness are considered factors in the longevity of a company. In other words, companies that follow high quality environmental, social and governance standards are more likely to outperform their peers in the long-run.


Pros and Cons of Environmental, Social, and Governance (ESG) Criteria

In years past, socially responsible investments had a reputation for requiring a tradeoff on the investor’s part. Because they limited the universe of companies that were eligible for investment, they also limited the investor’s potential profit. “Bad” companies sometimes performed very well, at least in terms of their stock price.

More recently, however, some investors have come to believe that ESG criteria have a practical purpose beyond any ethical concerns. By following ESG criteria they may be able to avoid companies whose practices could signal a risk factor—as evidenced by BP’s 2010 oil spill and Volkswagen’s emissions scandal, both of which rocked the companies’ stock prices and resulted in billions of dollars in associated losses.

As ESG-minded business practices gain more traction, investment firms are increasingly tracking their performance. Financial services companies such as JPMorgan Chase, Wells Fargo, and Goldman Sachs have published annual reports that extensively review their ESG approaches and the bottom-line results.


Is ESG right for you?

Hopefully ESG investing has been somewhat demystified for you now. If you were already aware of it, perhaps your enthusiasm for the investing philosophy has been stoked further or renewed. If you’re attracted to socially responsible investing, and you want your portfolio to outperform the broader market, ESG investing could be a great match for you.


Is ESG investing possible in India?

In November 2019, the SEBI made it mandatory for the top 1000 listed companies to prepare an annual business responsibility report (BRR). A BRR is a disclosure of adoption of responsible business practices by a listed company to all its stakeholders.

The Nifty 100 ESG TRI has 88 companies, spread across 16 sectors. Financial Services, IT, Consumer Goods, Energy and Automobile are the top five segments. Since its inception in March 2018, the Nifty 100 ESG TRI has delivered 11.46 per cent returns. During the same period, the Nifty 50 TRI index delivered 10.16 per cent. Nifty names such as Vedanta, Tata Steel, ITC and Maruti Suzuki do not figure in the Nifty 100 ESG.


ESG Index versus Thematic Funds

There are three funds currently that invest in ESG-themed companies.

  • SBI Magnum Equity ESG Fund (SBIESG, rolled out in May 2018; earlier called SBI Magnum Equity Fund).
  • Quantum India ESG (QESG), launched in July 2019 and
  • Axis Equity ESG rolled out in February, 2020.

Axis Equity ESG Fund will invest 30% of its corpus in stocks listed overseas and rest in India shares. “In addition to ESG backed sustainable growth investment opportunities available in India, investors will get access to businesses and themes with strong ESG practices that are not available in India,” says Ashwin Patni, head-products, Axis AMC.

Compared to developed countries, India has been a late entrant in this space. Many companies, predominantly in the large-cap space and some in the mid-cap segment, made ESG disclosures through their sustainability report. “As investors engage with companies and seek more ESG disclosures and regulations mandating BRR for top 1000 companies, we can expect the investment universe to surely increase,” says Chirag Mehta, senior fund manager, Quantum Asset Management Company. There are enough opportunities for investors in ESG space, Mehta added.


Performance of ESG Funds

In the research conducted by Bloomberg in January, 2020, it was found that nine out of the biggest ESG mutual funds in the U.S outperformed the S&P’s 500 last year, out of which 7 of them beat the market benchmarks over the past five years.



Bloomberg’s fourth-annual ranking of the largest environmental, social and governance funds with five-year track records, shows sustainable investing isn’t just for do-gooders. It’s a money-making opportunity that’s gaining popularity. Assets managed by the 75 retail funds in the survey climbed more than 34% to $101 billion last year as socially conscious money managers bet sustainable investing will help them find new growth opportunities.

The report also said that the ESG managers outperform when they focus not just on “box-checking,” but finding long-term competitive advantages, said Katherine Collins, who co-runs the Putnam Sustainable Leaders fund with Stephanie Dobson.


The next “mega trend” in equities

“For the first time since WWII we sense a shift from growth to climate and environment. This will become the priority of governments and their citizens. Food shortage, clean water and air become existential questions,” Saxo Bank Chief Economist Steen Jakobsen said in his latest quarterly outlook report.

“Governments will increase investments and subsidies for ‘green’ industries. This shall start a new mega trend in equity markets,” Saxo Bank Head of Equity Strategy Peter Garnry said in the report.

“We believe that these green stocks could, over time, become some of the world’s most valuable companies. Even eclipsing the current technology monopolies as regulation accelerates during the coming decade. Investors should consider tilting their portfolios towards green stocks so they don’t miss this long-term opportunity.”


ETF Explosion

According to recent ETFGI data, ESG ETFs represented $52 billion of the $6 trillion Global AUM of the ETF market.

However, the 2020 Global ETF Investor Survey from U.S. private bank Brown Brothers Harriman (BBH) estimated that nearly 74% of global investors plan to increase their ESG ETF allocation over the next year. In five years, almost one in five investors said they would allocate between 21% and 50% of their portfolio to ESG funds, and BBH concluded that ESG “doesn’t appear to be a passing fad.”



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