Socially Responsible Investment (SRI)

Socially responsible investment, or SRI, has grown into an increasingly popular investment choice over the last decade. So, is SRI a good investment choice, and is it something you should consider for your clients?

SRI has been available in Australia as an investment option for a number of years now. When it was first introduced, many investors steered clear of the investment option because it was unproven and the funds’ earlier incarnation, the ethical or green funds, had not performed well. Investors who wanted to feel warm inside knowing that they were doing something positive seemed to be the only investors to embrace the new socially responsible funds. Now however, their positive track record is making more traditional investors sit up and take notice.

Socially responsible investment funds are managed investment funds that invest in companies based not only on their financial viability but also on their environmental, social and human rights practices. Many of today’s managed investment funds and superannuation funds will include a socially responsible investment option.

Where do SRI funds invest?
While the different SRI fund managers will use different vetting criteria to determine the suitability of a company for inclusion in their SRI fund, they are all based on certain social and environmental factors. Most SRI funds will not invest in many industries including the tobacco, pornography, arms or nuclear industries. However, some funds may consider investments in companies that are involved in the mining or alcohol industries for example.

How does an SRI manager determine what companies to invest in?
SRI managers will have a range of social and environmental as well as financial criteria that must be satisfied before a company will be considered for inclusion in their SRI fund.

Environmental considerations for example may cause one fund to completely reject all mining companies while another SRI fund may include mining companies if they can demonstrate that their mining practices are minimising any harmful effects to the local environment. They may also look at investing in a mining company if they can show that they are beginning to implement strategies that will minimise environmental damage. Also, social considerations may allow a mining company to be included in a particular SRI fund if the manager sees that the miner is providing valuable services to indigenous or other local communities living in the vicinity of their mining operations.

Socially responsible investment funds will also look at social considerations such as the company’s workplace practices, their human rights record and their business ethics. They may also look at how they contribute to the community through charitable donations and the sponsorship of community programs.

Of course, a company still has to demonstrate that they can be a viable financial concern and that investing in the company will provide a good return on the investment made.

How do SRI funds stack up?
When the first ethical funds were launched during the 1970s and 1980s they were predominately ‘green funds’ which invested in companies that were considered environmentally sound. Unfortunately for investors in these funds, there was little regard for the financial viability of the company. As a result of this lack of financial scrutiny, these funds often performed quite poorly. But with current SRI managers closely examining the balance sheets of any company being considered for investment, today’s SRI funds are far removed from their ethical and green predecessors. And they have the results to prove it.

In fact, socially responsible investment funds are now appearing among the top performing managed investment funds.