Socially Responsible Investing (SRI)

Socially Responsible Investing (SRI)

Social Investing and Philanthropy: Understanding the Differences

So far we have looked at some basics of what Socially Responsible Investing is and seen some different examples of SRI strategies. Individuals who prioritize social and environmental responsibility have probably given to charitable causes or non-profit organizations whose work they admire/support. While charitable giving and socially responsible investing may overlap on issues, strategies and motivations differ. Both are important - each involves directing financial/economic resources to issues people care about but we believe there are some important differences that investors looking at SRI strategies should understand.

• First, SRI strategies enable individuals to align their personal values with their investments - in other words, SRI is about generating a "double bottom line" - a financial return for investors while simultaneously having positive social or environmental impact.
  
• Second, SRI strategies - almost by definition - address environmental or social issues through money-making solutions - companies, projects or business models that aim to make a profit by providing goods and services. Charitable and philanthropic organizations support a broader range of solutions beyond  profit-making (e.g. food pantries, disaster relief, etc.).
  
• Finally, the source of funds for SRI strategies and philanthropy are different. For example, for individual investors, philanthropy and charitable giving might come out of monthly expenses, while SRI strategies are part of investments, loans or even bank deposits.

These differences are significant and let's see how they play out in a given issue: poverty and economic underdevelopment. Philanthropists might choose to focus on areas where they believe commercial solutions are unlikely, such as funding schools in remote areas or providing free healthcare. Socially responsible investing strategies, however, would focus on profit-making approaches. Social screening could address this topic by assessing how large companies operate in developing countries and pro-active investing could involve investing in a microfinance bank providing financial services for low income borrowers. Similarly, a shareholder activism approach would be to engage with certain companies on supply chain responsibility - in particular, encouraging companies' vendors to adopt a "living wage."

Clearly philanthropy and charitable giving can seek to tackle problems where commercial solutions aren't likely to develop. But for problems requiring large amounts of capital and dealing with commercial solutions, SRI strategies are well-suited.