The primary goal of investing is to earn a return. Yet, for many investors, the growth of their assets is only part of the picture. Like a family vacation, it's important to consider how you're going to get there. Investment capital is a powerful resource, and these investors want to see their capital used in ways that will generate social benefits, while it builds their portfolio. This attitude is referred to broadly as Socially Responsible Investing, or SRI, and it incorporates a range of strategies and vehicles.
The roots of SRI go back centuries. In the 18th and 19th centuries, for example, religious groups including the Quakers and Methodists boycotted the slave trade and other industries they considered to be morally objectionable. That same tactic fueled the rise of modern SRI in the 1970s, when advocacy groups targeted companies dealing with South Africa's apartheid regime. The slow throttling of investment, as activists raised public awareness through boycotts and press releases, was a factor in ending that racist regime.
Screening companys' activities and policies for undesirability remains a large part of SRI. Most investments characterized by that description avoid specific industries such as arms manufacturing and tobacco, or those notorious for pollution or sweatshop labor practices. Oversight organizations track corporate investment and activities, in order to rate their behavior on these and other points of concern. One common tactic, widely used to evaluate publicly-held companies, is to purchase shares. As shareholders, the activist organization or individual investor can play a direct role in shaping company policy.
Not all screening is based on negatives. While some investors shun petroleum companies, for example, others seek out producers who represent best practices within the industry. This approach provides companies with an incentive to meet the standards of ethical investors, which in turn influences their behavior. Most individual investors don't have the resources to sway a company's course, but collectively in the form of mutual funds or pension funds, they can certainly play an activist role.
Impact investing is a more proactive approach to SRI. Its goal is to create socially conscious enterprises from the ground up, by the judicious use of venture capital. Companies that engage in impact investing look for opportunities that are too capital-intensive to be funded by private donation or cash-strapped local governments, but carry the promise of social benefit and sound profitability. Their investment might fund low-income housing, for example, or provide startup capital for a community-based microfinance organization. By putting their money into these unconventional projects, impact investors leave a legacy of social benefit while still generating a sound profit.
Microfinance is another key area where ethical investors can make a difference. The world's working poor, especially in rural and farming areas, often have little access to conventional financial services. Banks are reluctant to issue loans to borrowers with limited income and assets, and other services such as wire transfers, savings and insurance can be difficult or impossible to access. Microfinancing organizations secure operating funds from donors or investors, then use these funds to provide financial services to the poor. Microcredit is the best-known of these services, providing small loans for entrepreneurial startups or other purposes. Some aid organizations are able to provide help from more than one direction.
The Mennonite Central Committee (MCC), for example, provides microcredit startup loans in several countries for economically disadvantaged entrepreneurs, mostly women. Many of these businesses produce craft items, and fair trade retailer Ten Thousand Villages, a not-for-profit organization connected to the MCC, buys their products for retail sale in North America. The proceeds from the stores are funneled back through the MCC's programs to continue the process.
There are several ways to support ethical investment, depending on your resources and investment style. If you invest directly, select companies from the Domini 400 Social Index in the United States or the Jantzi Social index in Canada, which are pre-screened for social responsibility. If you prefer managed investments, many mutual funds companies have one or more ethical funds, and some specialize in them.
Take part in impact investing by seeking out a suitable venture capital firm to get involved with, or by constructing a partnership with other investors in your area to address a specific need. Whichever approach you choose, you'll be helping leave the world a better place than it might have been without you.
Jessica Bosari is a freelance writer and blogger for various publications and her own blog. You can read more of Jessica's work here. If you have any comments or questions about SavingTools or about saving money, leave your comments in the form below or email firstname.lastname@example.org. Thanks!