There has been an increased demand for businesses to conduct their operations in a socially responsible way. This demand comes due to an increased drive towards sustainability and considering the needs of society as a whole. The idea of socially responsible operations has also translated into the investing world through socially responsible investing.
What is Socially Responsible Investing?
Socially responsible investing (SRI) is a process that involves investments considered socially responsible. With SRI, investors have to identify companies that conduct their operations in a socially responsible manner. Once they do so, they can invest in the stocks or securities of those companies only. Socially responsible investing relates to how the underlying companies perform their operations.
As mentioned, the demand for socially responsible investing stems from a drive towards acting to benefit society. Therefore, SRI builds on that idea. By investing in companies that conduct their operations in that manner, investors can encourage such behaviour. SRI also relates to ethical investing, where investors prefer moral values as their primary investing objectives.
What are the advantages of Socially Responsible Investing?
There are several advantages that socially responsible investing may include. Most importantly, it allows investors to indulge in ethical investing. By doing so, investors can help businesses that can provide benefits to society as a whole. However, that does not imply that investors have to sacrifice their gains. With SRI, investors can achieve both ethical investing and decent returns.
Socially responsible investing also encourages local businesses. By doing so, investors can significantly support companies that make the extra effort to ensure social responsibility. On top of that, more people are supporting socially responsible businesses. Therefore, investors can also expect their investment value to increase due to an increased demand for these businesses.
Overall, socially responsible investing can be highly motivational for both companies and investors. Investors can achieve peace of mind and feel rewarded for supporting socially responsible businesses. On top of that, they can actively contribute to social responsibility through their investments. However, it does not imply that they will be making any sacrifices to do so.
What are the disadvantages of Socially Responsible Investing?
Despite its many advantages, socially responsible investing can have some risks or drawbacks. The most primary of these is the overemphasis on the ethical factor. While investors can still get decent returns on these investments, they may not be maximum. When investors place so much emphasis on social responsibility, they may hinder their returns.
Building on the above point, investors may also overlook several investments to find ethical ones. It may impact investors in several ways. The most important of these is the risk of getting lower rewards or higher risks. Similarly, SRI may force them into a position where they can’t build a diversified portfolio. Overall, investors have to decide on whether they want to emphasize ethical investing.
Lastly, investors must identify the right investments with the socially responsible investing strategy. However, this process is easier said than done. Many companies claim to operate with social responsibility but very few actually do. For investors, this point may introduce several difficulties in their objective to be socially responsible.
Socially responsible investing is an investment strategy that requires investors to prefer ethical investments over others. There are several advantages of this strategy that can benefit both investors and companies. Despite that, it may come with several disadvantages, as mentioned above.