Many of us recycle waste, avoid buying products from certain companies and try to cut our carbon footprint. In reality though, we all make compromises. How does this balance work when it comes to your own investments? What are the challenges and options facing you when these important issues really do matter?
Socially responsible investing – or SRI – is a catch-all term for investment strategies that focus on social or sustainability issues. Social issues broadly relate to diversity, human rights, consumer protection and animal welfare. Sustainability issues relate to the use of resources and tackling environmental concerns such as climate change and hazardous waste management. Not all issues are global, some are local.
There is one unifying theme in socially responsible investing today – an investment discipline that takes into account the environmental, social and general way companies are run, with the aim of generating strong, long-term financial returns, and delivering a positive impact for society in general.
In the early stages of SRI investing, investment opportunities were often described as ‘ethical’ and populated by funds that avoided the ‘seven sins’: tobacco, alcohol, arms manufacturing, pornography, nuclear power, animal testing and gambling.
The trouble is that it is very difficult to define ‘good’ and ‘bad’ in the grey world of commerce. Should a large and ethical engineering company with a small subsidiary making tools that could be used in building weapons be classified as a bad company? The difficulties of such an approach are self-evident.
How can you sensibly integrate SRI investing into your own investment programme if this is a requirement for you?
There is a new and developing ‘third way’ – if you imagine a continuum with traditional investments at one end and philanthropy at the other, in the middle sits ‘impact investing’. Traditional investments seek a return on capital, i.e. a market rate of return for risks assumed. Philanthropists seek self-actualisation, sweetened by tax relief. The middle ground of impact investing seeks a return of capital, hopefully with some additional return – perhaps to be reinvested in more impact opportunities – but where the financial outcome is less easily defined in terms of expected returns, risk and relationship to other assets held.
Where do you start?
For those who want to invest and do ‘good’ at the same time, finding the right opportunity is relatively difficult and takes time, which itself is a valuable resource. Finding the cause which suits a particular need is a further refinement because generic help rarely feels as good as specific help. Perhaps this is why many charity advertisements have pictures of single individuals as opposed to large groups: “I can’t possibly help them all, but I can help this one”.
We find that investors often take a personal interest in the subject and many have a desire to ‘kick the tyres’ and be involved in some way, or actually visit a project and see for themselves. This can’t be done through a portfolio of investments managed by a global institution.
These trends have not gone unnoticed by the UK government and HM Treasury recently published guidance ‘Social investment tax relief’ in March 2015 to provide a nudge to investors by way of tax breaks.
By way of example only is the Resonance Bristol SITR Fund which launched in June 2015. This SITR fund aims to harness the new government initiative to empower social enterprises to tackle inner city poverty while still targeting a risk-adjusted return to investors. Some of the social issues that investees will tackle include: job creation, skills development, debt reduction & support, improved standards of living, health & well-being, addressing the needs of addicts and ex-offenders, improving access to affordable accommodation, alleviating long-term unemployment and reducing the cost of living.
Source: A social investment fund for Bristol October 2014
Whether investors want it big and easy or small and involved, there are opportunities available to engage a proportion of overall wealth into specific SRI areas, and like all investments, social or otherwise, great care and due diligence is required beforehand.
The Resonance Bristol SITR Fund is provided as an example for information only. This information is based on our current understanding of HMRC practices which are subject to change. This article is for information only and does not constitute a personal recommendation nor personalised advice.