Social investing has received a lot of interest in recent years – especially following the financial crisis. Most people, however, are left wondering: What is social investing? Let’s answer this question.
To understand what social investing is, we must first consider how traditional investors look at the world. In traditional investing, investors weigh investment decisions by looking at two broad factors – risk and financial return.
Risk, Return – and Social Impact
Each investor has a certain comfort level across the risk-return spectrum, and he or she does their investing within that band of the spectrum. An investor might be comfortable giving up some of their return if an investment is safer. On the other hand, the same investor might be willing take a little more risk with an investment if it translates into a higher return.
In social investing, a third factor is thrown into consideration – social impact. Social impact means that the enterprise supported by the investment yields some benefit to society beyond the income it generates for investors. Conversely, an enterprise can also have some negative impact on society, and a social investor will also take this into consideration when making investments.
Just as traditional investors are willing to make a trade off between risk and return, social investors are willing to make a trade off between risk, return and social impact. If an enterprise is doing something that’s improving the environment, for example, a social investor may be willing to give up some financial return or assume greater risk on that investment depending on his or her individual comfort level.
In short, social investing can be defined as considering the social impact of an enterprise when making investment decisions. By this standard, a number of investment approaches fall under the umbrella of social investing: mission investing, responsible investing, double-bottom-line investing, triple-bottom-line investing, ethical investing, sustainable investing and green investing. Business opportunities
Within the universe of social investing, there are two broad categories: social screening and impact investing. In the social screening methodology, an investor comes up with a list of social standards that he or she wants his or her investments to meet.
The investor eliminates any company that does not meet these standards and then invests in the “socially responsible” companies that do meet the standards in a way that meets the investors risk and return objectives.