Making the world a better place with your money

Many investors focus mainly on how to maximise their financial return. Beyond just looking at financial results, however, more and more people now also want their investments to have a positive social and environmental impact.  

WHAT IS SOCIALLY RESPONSIBLE INVESTING

Socially responsible investing (SRI), which originally focused largely on avoiding investments in companies that do harm, actually has a long history. More than 200 years ago, Methodist church founder John Wesley urged his followers to avoid profiting at the expense of their neighbours. To follow his admonition, they avoided investing in companies that produced alcohol, tobacco, weapons or gambling.

Until about half a century ago, most SRI continued to focus on avoiding investments in companies associated with undesirable social activities. Over time, however, people began to look at other social issues such as apartheid or worker protection. Investment screening then became more complex, as investors broadened their definition of social responsibility and avoided companies with activities they felt were inappropriate.

More recently, SRI has shifted again, towards an expanded environmental, social and governance (ESG) framework. Rather than just avoiding “sin stocks” such as alcohol or gambling, investment advisory Morningstar explains, ESG-based sustainable investing holistically analyses a company’s track record in everything from pollution to social justice. “Simply, ESG-leading companies care about the sustainability of the world in which they operate having a better long-term future — while delivering good returns.”

Some investors have gone even further and started to focus on “impact investing”, which Non-profit Finance Fund CEO Antony Bugg-Levine describes as enabling investors to place funds into investments that promise to make a quantifiable social impact as well as a financial return. Examples include investments in microfinance, community development, and clean technology. While impact investing is designed to solve social or environmental problems, investment consulting company Cambridge Associates notes that impact investments may have a longer-term horizon, entail higher risk, and require social return expertise to evaluate. 

That said, the returns from impact investing can be good. The Global Impact Investment Network surveyed 209 impact investors with a total of US$114 billion (S$155 billion) in assets this year, and they reported an average gross return expectation ranging from 7 per cent annually on loans in developed markets to 16.5 per cent on equities in emerging markets — albeit with significant risk. 

MAKING INVESTMENTS WITH A CONSCIENCE

The first step in socially responsible investing is to figure out what’s important to you and set your criteria for your investments. You could look for companies that support their workers well, for instance, and ones that protect the environment. Once you’ve decided on your focus, you can start looking for investments. 

Wealthy individuals do have more opportunities for SRI and impact investing through private banks or other advisers, with banks such as Credit Suisse even appointing impact investing strategists in Asia. 

Admittedly, opportunities are still greater in some other countries. In the US, for instance, investors can invest in socially responsible unit trusts or exchange traded funds (ETFs) such as the Vanguard FTSE Social Index Fund, which tracks stocks that have been screened for social, human rights and environmental criteria. And platforms such as Aspiration and ImpactUs enable individuals to invest in companies with sustainable, environmental and employee practices.  

Average investors here who want to invest based on ESG factors can also now do so in several ways.  

One option is to use screening tools such as YourSRI, which shows ESG scores for mutual funds and some companies, or ETF Database, which shows ESG ratings for US exchange traded funds (ETFs). Investors could use the ratings to select unit trusts which are also available in Singapore or to choose ETFs in other countries which meet their criteria for socially responsible investing and are available through local brokerage firms.  

Investors may also be able to ask financial advisers who have access to screening tools such as the Morningstar Sustainability Rating for help in identifying investments that meet their needs. 

Another option is to read companies’ annual reports and invest in firms listed on the Singapore Exchange (SGX) that have good ESG practices. The SGX Sustainability Indices, launched last year, comprise SGX-listed stocks with ratings based on ESG research. SGX is introducing mandatory ESG reporting from the financial year ending December 2017 onwards, and some companies have already started their reporting. 

It may also be possible to invest through some international platforms, such as Oikocredit, which invest in fair trade, microfinance or agriculture enterprises.  

Impact investors who are willing to take higher risks can also find and invest directly into social enterprises in the region. iGrow in Indonesia helps underemployed farmers produce organic food, for instance, and Cropital is a similar enterprise in the Philippines. While the scale of the investing is small, the impact can be large.

Additional searches or discussions with advisers could lead to even more opportunities.  

INVESTING RESPONSIBLY

While many investors simply want to achieve the highest return possible, investors who want to invest based on socially responsible principles and also earn a good return have more options than they might expect. Even though it may take a bit more effort to find the investments, socially responsible and impact investing can enable investors to do good while doing well.