Socially Responsible Investing (SRI) or social investment is an investment made in companies engaged in creating a positive, sustainable impact. Examples of such companies can be solar energy, wind turbine companies, etc. Investments can be made in companies or specific mutual funds.
SRI strategy also involves barring investment in companies that negatively impact society, such as manufacturing companies that emit greenhouse gases.
Understanding SRI strategy
As per a 2021 report by Outlook Money, a financial magazine, this global phenomenon of investing in socially responsible companies has been catching up in India. The Indian market has seen a recent introduction of such funds for investors looking for sustainable means of investing.
A variety of new funds and pooled investment vehicles such as mutual funds or Exchange Traded Funds (ETFs) have made SRI strategy easy with just a click. Investors can also invest based on three factors: environmental, social and governance (ESG).
The two primary focuses of making such an investment should be sustainable investing and financial gain. A company being lauded because of its social activities doesn’t necessarily imply that you will get good returns from that investment. Instead, you have to conduct thorough analyses, such as fundamental analysis that pictures its positioning and foothold in the market and its financial status.
Political factors also play a crucial role since the political implications may favour or oppose these companies.
As per Emerging Portfolio Fund Research’s report, such social investments increased from $63.34 billion in 2019 to $168.74 billion in 2020.
According to KPMG’s 2020 sustainable investing survey report, 44% of ESG-oriented hedge funds could manage fat-tailed, far-off risks, thereby delivering alpha returns. In its 2020 research analysis, global asset management firm Arabesque Partners stated that 80% of the reviewed studies demonstrated that sustainability practices positively impact investment performance.
Many studies have also found that SRI mutual funds can match and perform better than traditional mutual funds.
How to build an SRI portfolio?
Making an SRI portfolio isn’t very complicated. To begin with, you need to open an investment account through a smart investment advisory platform that provides bespoke financial advice and effectively guides you towards financial management.
1. Identify SRI sectors: Identification of sectors is the first step towards building your SRI portfolio. Renewable and clean energy are some examples that are aimed towards sustainability.
2. Identify SRI companies: After identifying the sector, choose the sector that favours the country’s geopolitical issues and then narrow down the companies in that sector.
3. Conduct your research: After identification, perform fundamental analysis to check the financial status of a company, take financial advice and then invest accordingly.
To build a robust SRI portfolio, it is essential to consult an expert who can take into consideration your demands, financial goals, risk tolerance, age and investment horizon to curate bespoke investment plans that are in line with your beliefs and investor profile.