The investment industry has evolved over the years thanks to the rise of ethical investing. Being green and ethical has gradually become enmeshed in our social fabric and has undoubtedly weaved itself into the investing world. Ethics and sustainability have progressively become vital factors that investors consider when making financial investments.
Investors now seek advisors who understand their concerns, values, and goals, making ethical investing gradually move into the mainstream. But what makes an investment fund socially responsible?
1. Alignment with Personal Values
Socially responsible funds are investments where the investor has another goal besides financial rewards. In this case, they want to do good or as little harm as possible to the environment and society. Socially responsible funds are investments aligned with an investor’s personal values and moral code. They incorporate the investors’ priorities and values. For instance, the investments could be in companies that do not harm the environment or society or those that create a positive environment.
2. A Company’s Operations
Since socially responsible funds aim to generate financial returns and social change, businesses have had to rethink their operations to accommodate the increasing demand for ethical investment opportunities. To attract ethical investors, their business operations need to adhere to the ESG rules and an investor’s values.
Investors will exclude companies making a negative impact on the environment or society but embrace those making a positive impact, like solar energy companies. Ethical investors assess a company’s business operations and revenue sources to ensure they align with their values.
Businesses that want a share of the ethical investing cake need to ensure their operations align with investors’ values. For instance, they can ensure they reduce their carbon footprint, advocate for women in leadership, observe the rights of women and marginalized groups, support people of color, and more.
When a company’s operations revolve around these focus areas, they position themselves as worthy places to invest, making them socially responsible funds. But since people have different values, a company’s industry will guide a business towards working to become sustainable and socially responsible.
3. ESG Performance
A company that observes sustainability practices is better placed to have positive investment performance. Socially responsible funds need to meet the ESG expectations placed upon them. ESG refers to the environmental, social, and governance factors that relate to a business’s operations and management. This ESG assessment works in place of traditional financial analysis by highlighting a company’s ESG opportunities and risks. A company with a higher ESG score is considered a socially responsible or sustainable investment.
The analysis checks the quality of a company’s management, adherence to human rights, energy consumption, pollution, climate change issues, community engagement, workplace safety and health of workers, and more.
According to statistics, 78% of investors consider ethical investing more important now than five years ago. In addition, at least two-thirds of them have considerably increased their investments in socially responsible funds over the past years. These statistics show that value-based investing can only keep growing as more people invest in sustainable funds.