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Socially Responsible Investing – What Does That Mean, Anyway?

Confused about what Environmental, Social & Governance (ESG) and socially responsible investment (SRI) really mean? We don’t blame you! Definitions vary wildly – and many funds are less “responsible” than the name might suggest.

Against a background of global problems such as climate change, inequality, and poverty, today’s investors are looking for funds that deliver more than a financial return. But choosing the best socially responsible investment can be complicated.

Your vision might be an investment that creates a cleaner, greener and better future for everyone. So, is that what you get when you invest in an SRI or ESG fund? Let’s take a look…

What are SRI funds?

The definition of SRI funds shifts and changes depending on who you ask. Most definitions you will find online are wide open.

For instance, Investopedia defines socially responsible investing according to “the nature of the business the company conducts”. But in practice, many socially responsible investment advisors simply exclude the very worst offenders – weapons manufacturers or tobacco companies, for example.

Generally speaking, we could say that socially responsible investment products should not harm the environment or society. But this begs the question “What does it mean to be socially responsible?”.

Why not proactively invest in companies that are making a positive impact on the world?

This is where ESG comes in (kind of!).

What is ESG investing?

ESG stands for Environment, Social and Governance’. ESG rankings are based on data regarding many factors including for instance a company’s carbon emissions, labour rights, gender equality, management practices, and more.

Definition of ESG infographic

Source: University of Toronto

So far, so good. But does this approach go far enough? ESG data focuses on the operations within the company – it hardly ever considers the impact a company’s product has after leaving the business premises.

This can lead to some questionable companies being included in funds based around ESG criteria.

For example, Alibaba made the sustainability fund of a major Swiss bank. Yes, you read that right: the Chinese e-commerce giant, which sells fast fashion for as little as $US2 a piece, is a hero of sustainability.

According to that bank’s criteria, anyway…

You see, a company like Alibaba can be “operationally excellent” according to a ESG rating. This is because ESG ratings typically don’t consider the environmental and social impact of the products and services themselves. For that reason, we feel ESG should only be one part of the assessment of whether a company is included in a socially conscious or sustainability-focused investment.

Example of SRI investing

Alibaba is included in a sustainability fund of a major Swiss bank

Is ESG and SRI investment a bad thing?

Not at all – the evaluation has to start somewhere. ESG rankings and exclusion criteria are a great place to start. But as the Alibaba example shows, it only addresses part of a company’s impact on the environment and society.

To speak of real socially responsible investment, the focus needs to be on product impact too. That means considering whether a company’s product has a positive or negative impact during its entire lifecycle – from the extraction of its raw materials, through processing, manufacturing, distribution, use, repair, maintenance, and disposal or recycling.

What is positive screening?

Although exclusion criteria are important in socially responsible or sustainable investing, its proactive counterpart shouldn’t be forgotten.

Positive screening ensures an investment makes the world a better place – for instance through the products or services it creates. At Yova, we assess companies in-depth according to impact areas such as renewable energy, electromobility, Internet of Things, medical technology, and more. It is up to you, the customer, to decide which of these matters to you and which of these you want to invest in.

Positive and negative screening in combination make it possible to invest responsibly. But there are additional factors we keep in mind when creating impact investment strategies for our customers – we will explain in the last section of this article.

What is a Green Fund?

As the name implies, a green fund is a socially responsible investment fund that only invests in companies that are eco-friendly or do not impact the environment in a negative way. As with SRI, the definitions vary greatly, creating an opportunity for artistic license.

Some consider “no negative impact” enough to deem a fund green. Others invest proactively in companies engaged in environmentally supportive activities, like renewable energy, waste management, sustainable products and so on.

The biggest downsides of green funds (and any other fund, for that matter) are lack of transparency and often hidden fees. To win your business, many investment managers will emphasise the amazing returns you stand to have.

However, they also create complex products and fee structures that tend to overwhelm you into not reading the fine print too closely before signing the contract (admit it, when was the last time you read 20 pages of terms and conditions from your bank?).

The problem is, you can sometimes end up paying up to four times more in fees than you thought you would. This widespread problem was revealed in a Financial Times investigation earlier this year (read more).

When you invest with Yova, on the other hand, you are buying the stocks and bonds directly in your name. You don’t end up entangled with a complex financial product. You make a simple, direct investment – and become a shareholder in every company you invest in.

This gives you the possibility to vote in the company’s shareholders meeting and have a say in their future, and the future of your investment.

Best of all, we have one ultra-transparent fee of 1.5 percent with no additional charges and no hidden costs – ever.

How do you assess how socially responsible or sustainable a company is?

At Yova, we strongly believe that socially responsible investing needs to go further than SRI and ESG criteria. This is why our process for choosing the right companies is more rigorous than most.

A few of the things we take into account are:

1. Impact Areas

You tell us where your interests and passions are. Renewable energy, electromobility, Internet of Things and medical technology are just a few of the themes your investment can include.

We always ask: Does this company make the world a better place through the products and services it creates?

2. ESG Score

We always look at the ESG rating and how a company’s score fits with the values that are important to you as our customer. Corporate responsibility traits like human rights record and equality in the workplace are always thoroughly checked.

From here we start digging a lot deeper.

3. Exclusion Criteria

We allow people to exclude companies that have interests in nuclear, tobacco, alcohol, weapons, and warfare. This way you ensure your savings don’t contribute to these industries.

4. Cradle-to-Grave Impact

We analyse the entire lifecycle of a company’s products: from raw material extraction, manufacturing, distribution, use, repair and maintenance, as well as disposal or recycling.

It’s your investment and your choice. Our goal is to stand by you and by those values that truly matter to you.

Curious?

Keen to see what Socially Responsible Investing looks like at Yova? Get your free impact investing strategy here – one that contains all the companies we suggest you invest in, based on your personal values. This service is completely free and it entails no obligations to invest with Yova or to adopt that strategy.

If you have a Yova strategy already, login to view it here.

If you’ve accepted your strategy, congratulations! By investing, you not only support a company’s success, you become part of that success… growing your savings and having a positive impact on the world at the same time.