An Introduction to Socially Responsible Investing

I live in Western, Massachusetts and met my friend Terry Mollner here through socially responsible business circles. Terry was instrumental in creating some of the first social screens for investing in the late 1970s along with a gentleman name Robert Swann as members of The Institute for Community Economics, a progressive economic think tank.

Negative and Positive Screens

The screens for socially responsible investing (SRI) were largely negative and included industries and companies to avoid investing in due to their activities. Typically the list includes:

These days, we talk about both screening out and screening in companies. In other words, there are both negative screens and positive screens. Many of the positive screens are the inverse of their negative twin:

  • Environmental stewardship
  • Exemplary employee treatment, health and safety
  • Good governance
  • Exemplary treatment of communities in which they have a footprint
  • Social justice

These are powerful and key components of socially responsible investing research, but what should we call this 35-year-old industry? (For related reading, see: Impact Investing: The Ethical Choice.)

Naming the Investment Approach

In 2017 we have many more terms that apply and relate to what was once only called socially responsible investing. Let’s delve into the terms and language. More recent terms used to describe SRI are:

Large financial institutions seem to prefer the term ESG. There is disagreement over why they employ this term instead of SRI. Some argue that the word "social" has become toxic in American politics and that if one uses the word social, then it must be a part of socialism and socialism is bad. We don’t believe socialism is categorically bad, per se, but we do agree it’s important to communicate to people in a way that they will listen to what you’re saying.

There is definitely an argument that many people have a knee-jerk reaction to the term socially responsible investing and immediately internalize it. One of the first thoughts they often have is: “So am I doing socially irresponsible investing?” People may feel embarrassment and shame because we are getting into the realm of morality and judging one another. People think they’re being judged negatively and this is not a good mix of emotions to have to be open to learning more about SRI. This explains why dropping the word "responsible" has evolved to a large extent.

Similarly, the terms values-based investing and ethical investing have not really had traction because they evoke the concept of morality. Triple bottom line refers to profit, people and planet and that all of those are being counted.

Sustainable investing definitely has had traction but by far the term most widely used today is impact investing. People may still challenge what meets the test of being responsible, sustainable or has positive impact. This is a good thing because people then become engaged in the issues. One of the most common retorts after hearing these terms is: “Well, the company is staying in business and therefore providing jobs, isn’t that responsible, sustainable, and creating positive impact?” What a great beginning to a meaningful conversation. (For related reading, see: The Value In Socially Responsible Investing.)

Full Disclosure: Terry and I founded our firm, Stakeholders Capital in 2008.