Investment is laying out money or capital with expectations of returns or profit. While it is often associated with money, investment does not always imply financial returns or profits. Primarily, the purpose of investment is to gain something after laying down capital.
However, investment is beginning to take a new form globally. Initially, people invested without considering the effects on society or the environment. They only care about the profits of their investments. Nowadays, many people are becoming socially responsible with their investments. That is what makes up responsible investment.
Responsible investing, also known as sustainable investing, is when an individual incorporates personal values and principles into an investment decision. Those who invest responsibly choose to invest in organisations and companies hoping to generate social and environmental impact alongside financial returns.
Some sectors of society that these investors consider include health, safety development, and energy and climate change. At first, investing in business prospects because of personal values yielded little returns. However, by using positive screening of ESG, responsible investors are generating attractive returns.
Firms that provide sustainable investments opportunities for their clients help to secure extraordinary financial returns. Customers become loyal and improve their investing habits due to these opportunities.
Generally, responsible investors encourage social investments practices that promote environmental stewardship, human rights, gender diversity, racial diversity, and consumer protection. Many avoid investment opportunities in businesses that have a long-term negative impact on humans and the environment. Such enterprises include alcohol, tobacco, gambling, pornography, and military weapons, among others.
Investing in Capital Markets
Supporters of sustainable investing argue that access to capital is what will drive the direction of development in the future. They use various strategies to maximise returns while simultaneously maximising good social impact. Primarily, these strategies create change by lessening the capital cost of sustainable firms while driving up the cost of capital for non-sustainable firms.
Another strategy of responsible investors is to incorporate environmental, social, and governance factors into the analysis of equity investments. However, the approach to ESG differs among asset managers. Factors that affect the process include management, research, and application.
Management covers the question of who is responsible for the ESG integration within the organisation. In contrast, the research aspect covers what factors are being considered in the ESG analysis. Application answers the question of how ESG criteria are helpful in practices.
Negative screening removes some opportunities for investment from consideration because of their social or environmental impact. For instance, most sustainable investors screen out alcohol and tobacco company investment opportunities.
To divest means to remove stocks from a portfolio on ethical and moral grounds. Many of these objections that cause the removal are non-financial. They are typically a result of certain business activities of the affected organisation.
Responsible investors attempt to influence corporate behaviour positively. To do this, they initiate conversations and debates with corporate management on the issues of concern. They also vote and submit resolutions on these affected issues.
Shareholder activism encourages the belief that sustainable investors can work cooperatively to steer the course of management. They also believe that continual investment on moral grounds will improve financial performance over time and improve the wellbeing of employees, stockholders, vendors, customers, and communities.
Apart from this, there are also reports of investor relations activism. Here, investor relations firms assist sustainable investors in organising a change within an organisation. They do this successfully because of their knowledge of the organisation, its management, and the securities laws.
Shareholder Engagement is a sub-type of shareholder activism that requires all-inclusive monitoring of the non-financial performance of companies. Using the information from this monitoring, investors get feedback on ways to improve ESG issues within their area of specialisation and influence.
It is a concept that drives beyond just negatively screening companies' portfolios. Instead, it is a concept of active participation in the process of change towards moral investments. Sustainable investors make investments in companies that have a positive social impact.
The concept of positive investing allows investors to express their values on corporate issues such as social justice through stock selection. And by doing this, they do not have to sacrifice long-term performance or portfolio diversification. Positive investing assures people that investing on moral grounds can yield serious financial returns and help a company to succeed.
Positive investing has much support from many socially responsible investors. However, there is an alternative position. Impact investing is the private equity approach to positive investing. Impact investors target specific social objectives intentionally. They also target these objectives along with a financial return and then measure the achievements.
Primarily, their targets are businesses that impact society and the environment positively without many philanthropic donations. When they find such companies, they invest in them. However, this capital can take various forms, and these forms include private equity, debt, loan guarantees, working capital lines of credit, among many others.
Some recent examples of impact investment are investments in microfinance, community development finance, and green technology. An impact investor takes up an active role in guiding the growth of the said business.
When an investor invests in an institution directly without purchasing stock, they better impact society. It is so because the money spent on buying stock in the secondary market is a property of the stock's previous owner, which might not have much social impact.
However, any money invested in a community institution will work to impact the community positively. Such investments can help the institution to alleviate poverty, spread capital to under-served communities, support green businesses, support economic development, among many other social and environmental impacts.
Responsible investment is gaining ground because the clients’ and beneficiaries demand to know how and where they invest their money. Many of them insist on transparency when it involves their investments. Also, the realisation that the financial industry can influence social good has improved the chances of sustainable investment to bring in greater returns.
As long as a person has concerns regarding the morality of their investment, that person should become a social investor. Although the impact of sustainable investment is still debatable, one can agree that any investment that considers social and environmental impact is a good thing for humanity.