In this age of digital media, information is shared at a lightning pace. Individuals and companies alike are more aware than ever about the environment, human rights, diversity and other issues concerning citizens around the world.
More than simply aligning their own practices with their beliefs, people are turning to their investments to return more than just a dollar value. Simply put, we are looking to put our money where our values are.
In addition to the desire to effect positive change in their communities, there is a growing understanding of the impact of social, environmental and governance (ESG) factors on the health and stability of the market as a whole.
Over the last two years in the US alone, socially responsible investing has grown by more than 22% to $3.74 trillion in total managed assets.
So what is Ethical, or Socially Responsible Investing?
The United Nations Principles for Responsible Investing says that this approach “recognizes that the generation of long-term sustainable returns is dependent on stable, well-functioning and well-governed social, environmental and economic systems.”
ESG factors create a framework within which investment managers can include Environmental, Social, and Governance criteria in their portfolio creation decisions. For example, under social factors, a company will be assessed on their treatment of employees, fair wages, health benefits and policies against discrimination. For Governance, the factors include policies regarding board training and education, oversight, and transparency. Environmental indicators include carbon emissions, whether a product creates a pollutant, and supply chain sourcing.
In addition to looking at the policies for the future, companies could also be given a “controversy rating” – that is based on their track record of bad events (such as oil spills, or contaminated products) and the associated media attention, all of which may have negative impacts on share prices.
It is important to note that while all of these factors are valuable to socially aware citizens looking to influence positive change, they also have a bearing on the long-term stability of the company, and therefore the return on investment.
Organizations and individuals with managed investments can use these factors in different ways, by applying screens to their portfolios. Considering the values and needs of their stakeholders, as well as the risk, organizations can set thresholds, or limits, for what they will accept. For example, an environmental organization may wish to only invest in companies with high environmental scores. An organization researching lung cancer may want to avoid any company that derives a certain percentage of revenues from tobacco sales.
Simon Fraser University is currently debating the implications of ethical investing initiatives and is co-sponsoring a free discussion event on September 8, 2014 at 7pm with the Roundhouse. For more information, visit SFU Philosopher’s Cafe.
By Megan Simm, Roundhouse Blog Team. Megan works in communications and freelances as a social media strategist and blogger specializing in the non-profit sector. She is passionate about local food, community and sustainability. Follow @MegSimm on Twitter.