One of the most exciting things about being a startup investor is that it offers an opportunity to invest in the future. Whether it be through green energy tech, sustainable agriculture, advancements in medical technology, or others, the innovations that will power our future are often born of startups.
For investors who want to see their money make a difference, investment strategies like socially responsible investing (SRI) and impact investing, or risk management frameworks like environmental, social, governance (ESG) risk factors are tools that can help guide ethical investment decisions.
Socially responsible investing (SRI)
What is SRI?
Socially responsible investing (SRI) is an investing strategy that considers investment opportunities based on both their potential for returns and aims toward positive, ethical change, whether that be social or environmental. Of course, what is considered positive, ethical change, and what is deemed potentially harmful will vary from investor to investor based on personal values.
Using SRI
SRI can be applied to both the public market and the private market; however, it is most commonly associated with the public markets via mutual funds or ETFs. Either way, the screening approach is the same; avoiding investments in companies that could have potentially damaging social/environmental effects, such as tobacco, alcohol, firearms, gambling, etc., in favor of those whose products, business practices, and/or ethics better align with the investor’s values. Other strategies that fall under the SRI umbrella include divesting from companies that have a negative social/environmental impact, reinvestment in companies that have a positive impact, and shareholder activism.
When engaging in SRI, it is important to remember that the goal isn’t just to invest in any socially conscious company. To use the SRI strategy effectively, investors must balance both sides of the equation, using both traditional metrics to assess the potential for return as well as a screening process to look for opportunities that align with your personal values.
Impact investing
What is impact investing?
Impact investing is an investment strategy that aims to generate returns by investing in companies that are making a measurable, positive social/environmental impact. Examples of investment opportunities could be companies working toward the empowerment of minorities and women, environmental sustainability, affordable housing, expanded access to things like healthcare, education, financial services, etc.
Using impact investing
Impact investing is technically a subset of SRI. The primary difference between the two is the angle they’re coming from. While SRI is focused more so on screening out investment opportunities that have a perceived negative impact, impact investing is focused on identifying those companies making a positive impact. Impact investing is also more commonly associated with private market investments.
Impact investing includes many different forms of investment vehicles. For some investors, their ultimate goal in using this strategy could be financial returns. For others, that return on investment may be measured as a quantifiable social impact. Depending on the type of business, quantifiable metrics could be things like the number of people served, trees planted, the percentage of waste reduced, the number of jobs created, etc.
Environmental, social, governance (ESG) risk factors
What are ESG risk factors?
Environmental, social, governance (ESG) risk factors are a practical risk management framework that can be used to identify material risks that could impact a company’s value. It’s commonly used in both the public and private markets. Unlike SRI and impact investing, this framework is focused less on a company’s social/environmental impact as values, and more on material risks, though it can generate positive societal impact long-term.
Using ESG risk factors
ESG risk factors include things related to climate/environmental impact, working conditions, human rights, anti-bribery and corruption practices, regulatory compliance and regulations, corporate governance, etc. Should a company choose to ignore these risk factors or engage in unethical behavior, it could potentially face serious costs that impact its ability to sustain profits long-term. When assessing these risk factors, it can be helpful to approach it by considering these questions:
- Of these ESG risk factors, which could have a material financial impact on the company or its industry?
- Is the company managing these risks? How so?
- How could these risks potentially impact the company’s value in the long run?
Takeaways
Ethical investing or investing for good can mean different things for different people; there is no universal approach. Some investors may use these strategies and tools to guide their entire investment portfolio, others may use them selectively. When used in combination with traditional due diligence measures, SRI, impact investing, and ESG risk factors can all be useful tools in guiding ethical investment decisions.
*****
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
