SOCIALLY RESPONSIBLE INVESTING 101
David M. Smith, CFP®
Do you want some ESG in your portfolio? Investment jargon is filled with acronyms and terms that need defining. “SRI” is the most fundamental of these here as it stands for socially responsible investing. There is more subjectivity in designing SRI portfolios than traditional investments in that one applies her values when selecting an individual SRI investment or a well-diversified SRI portfolio. To help understand the materials you might see when looking for the right SRI investments for you, “ESG” is the second most important acronym to understand.
“E” represents the environment and is inclusive of climate change, support for alternative energy sources and avoidance of fossil fuels. Sometimes referred to as “green” companies, management pays attention to how the environment is affected by their products and services. Does the company make decisions that support clean air and water and avoid products and practices that contaminate the environment and exacerbate global warming?
“S” relates to the social impact of a company’s products and practices. How employees are treated and the fairness of their wages are parts of this screen. Companies that are far apart on this scale might be Apple and Walmart. Social impact goes beyond employee treatment to how a company’s practices and services affect society. For example, one mortgage company might consider ways to include the poor and undeserved communities in allocating its loans, while another might specialize in jumbo loans for the most expensive houses.
for government which includes how a company is managed and governed. If it is a publicly owned company, is the democratic process functioning and the flow of
information adequate for one to make informed judgments about how decisions are
made? Excessive CEO salaries can also come under the definition of government
and is often the subject of shareholder dissatisfaction. The “occupy movement”
which started on Wall Street and spread globally had as one of its primary
concerns “…howlarge corporations (and
financial system) control the world in a
way that disproportionately benefits a minority, undermines democracy, and is unstable.” (Wikipedia) Shareholder
activism is a common tool for addressing dissatisfaction with corporate
an elementary discussion of ESG and there is much more to these topics, but
from this basic explanation one can make more sense of what is meant by a
company’s ESG practices. For more information on this subject, click here to
visit the US)SIF website.http://www.ussif.org/sribasics