Socially Responsible Investing: How does Socially Responsible Investing work?

In the first chapter, we discussed a working definition of SRI: investment strategies that explicitly take into account the environment, social and governance performance of companies. The first also introduced three main SRI strategies: social screening, shareholder advocacy and proactive investing and mentioned the common goal of these strategies of achieving a "double bottom line" of both competitive financial returns along with positive change.

Let's look a bit more at each of these strategies:

• Social Screening typically involves building an investment portfolio through a process that explicitly eliminates or deliberately includes certain stocks or bonds based on the performance of those companies. The performance of companies could be assessed either across a wide range of social and environmental factors or it could focus on a select issue. Socially screened mutual funds or annuities are an important and common example of this SRI strategy.
   
• Proactive Investing involves investing in companies, projects or funds with business models specifically designed to achieve environmental or social change. Investing in a microfinance fund that seeks to generate both competitive returns on the investment and focuses on providing financial services to low income clients in developing countries would be a good example.
   
• Shareholder Advocacy involves reaching out to companies owned in investors' portfolios to encourage them to adopt more responsible policies and practices. Shareholder advocacy can take mainly two forms. The first is proxy voting, where the owner of the stock has the right to vote on key issues. The second is shareholder dialogue, where the investor meets directly with companies and seeks to persuade management and boards of the value of sustainability and good governance. Advocacy can impact a range of governance, social and environmental issues and is intended to improve the long-term performance of the company and the sustainability of the economy as a whole.

These types of SRI strategies work in very different ways but all are in some way looking at environmental, social and governance factors at some point in the investment process. Which of these strategies works for different types of investors depends on what an investor wants out of SRI and on how broadly the investor wants to adopt these strategies. Importantly, there are options within each that seek to provide both competitive returns and positive social impact.