A Guide to the Different Types of Social Investing
Social investing has come a long way in recent years. What started as a fringe activity linked to religious societies such as the Quakers is now a mainstream practice as well as a rapidly growing and diversifying financial industry.
Today, those who want to invest their capital for good have a broad; some would say bewildering; range of choices. New social investing approaches are emerging and search terms like “socially responsible”, “ethical”, “green” and “sustainable” investing bring up dozens of results.
But what do these terms really mean when it comes to investing? And, with so many different approaches to choose from, how can investors be sure they’re choosing the right one?
To help answer these questions, we’ve compiled the following list of definitions.
Social investing is an umbrella term that simply means providing finance to achieve a combination of economic and social and/or environmental goals. As popularly used, it encompasses more specialized approaches such as ethical investing, sustainable and responsible investing (SRI), impact investing, social enterprise investing, triple bottom line investing and more. It’s often loosely interchanged with other blanket terms such as “green”, “clean”, “socially conscious” and “socially responsible” investing.
Sustainable and Responsible Investing
Sustainable and responsible investing (SRI) is an investment discipline that uses a set of environmental, social and corporate governance (ESG) criteria to choose companies for investment.
A typical SRI approach uses negative screening to rule out investments in companies that produce or sell harmful substances, like tobacco, and those that engage in damaging activities, such as polluting or violating human rights. SRI does not necessarily include positive criteria designed to seek out companies that engage in desirable activities, such as those using sustainable practices, or those that produce specific products or services, such as clean technologies. Organizational governance and shareholder engagement are taken into consideration when choosing SRI investments.
There are no standard ESG measures for use in SRI, which can make it difficult for investors to assess companies accurately, even when they report ESG performance results. Efforts to establish standards and indices in areas like climate change and human rights are being pushed forward by organizations like FTSE, Standard and Poor and Ceres, as well as by the growing community of socially conscious investors.
SRI is a well-developed approach that now spans a growing range of products and asset classes including mainstream financial products such as publicly traded stocks as well as cash, fixed income and alternative investments, such as private equity, venture capital and real estate. Investments can be made in a range of individual companies or through socially conscious mutual funds or exchange-traded funds (ETFs).
Impact investing is an investment approach that intentionally seeks to create both financial return and positive social and/or environmental impacts that are actively measured. Impact investments may generate financial returns that are market-rate or sub-market-rate.
Key to this definition are the words “intentionally” and “actively measured”. Impact investors seek to create specific, positive impacts using financial mechanisms, then they require companies to report evidence that these impacts have actually been produced. Impact investing is distinct from SRI where negative impacts are avoided but positive impacts are not necessarily required. Impact investing is associated with efforts to build markets in areas such as renewable energy, sustainable agriculture and “cleantech”.
The term “impact investing” was first coined in 2007 and its early practitioners were largely philanthropic bodies and family offices. Today there are hundreds of impact funds with diverse areas of interest and investment philosophies. They are run by specialized asset managers such as Calvert, Triodos, and Root Capital and mainstream financial institutions such as J.P. Morgan, UBS, and Deutsche Bank. They focus on a variety of sectors, such as energy, natural resources and water, and they make investments in a range of asset classes.
In impact investing, as on other forms of social investing, measuring social and environmental impact is difficult. IRIS, a standardized measurement system, has been developed to facilitate impact measurement and provide comparable impact performance data. Businesses also use their own measurement systems, drawing from methods developed for other approaches (like SRI), and working with organizations like Ceres and the Global Reporting Initiative (GRI), to find ways to measure and demonstrate impact.
In ethical investing, investments are selected or excluded according to the individual investors personal beliefs and values. This makes it especially suitable for private investors with a strong personal commitment to particular causes or movements.
Ethical investing may mean ruling out investment in certain industries (such as firearms) or in companies involved in certain activities (such as contractors working in war zones). Ethical investment is associated with the movement to divest in South African companies during apartheid and with the current fossil fuel divestment movement. On the positive side, ethical investment can mean directing capital toward companies that meet ethical criteria.
The term ethical investing is sometimes used interchangeably with sustainable and responsible investing, but the SRI approach typically uses one overarching set of guidelines to select investments, while ethical investing tends to be more issue-based and produces a more personalized result.
Triple Bottom Line Investing
Triple Bottom Line (TBL) investing means making investments in companies that follow the reporting practice of TBL, also known as “3BL,” “People, Planet, Profit”, “The Three Pillars” and “Integrated Bottom Line”.
TBL is an accounting framework that allows businesses to measure and report three dimensions of performance: social, environmental and financial. The aim is to make an overall assessment of a company’s sustainability by measuring the impact of its activities on the world, including its profitability and shareholder values as well as its social, human and environmental capital. The idea was first framed by John Elkington in 1994.
While accounting for profitability in TBL is straightforward, coming up with a bottom line for social and environmental impacts has proven difficult. There is no universal standard method for calculating impacts in TBL and no universally accepted standard for the measures that are included in the three categories. Companies are free to choose what to measure and to adopt their own methods for measurement. Today, however, more companies are using standardized measurement tools, industry standards and indices such as the Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines.
Blended Value Investing
Blended value investing is an approach to impact investing that puts the concept of value at the heart of investment decisions.
In the words of its originator, Jed Emerson, this means recognizing that: “All organizations, for-profit and nonprofit alike, create value that consists of economic, social, and environmental components. All investors, whether market rate, charitable, or some mix of the two, generate all three forms of value”. The challenge in blended value investing is to make investments that generate the kind of values; positive ones; that you intend.
Blended value investing is more of a philosophy than a distinct investment methodology. In practice, however, its effect is to break down the barriers between traditional social investing and mainstream investing, opening up the field for social investors to interact with a range of markets using a values-based approach to guide investment decisions.
Social Enterprise Investing
Social enterprise investing means providing capital to support the growth of businesses that have positive social or environmental effects.
Initially a movement led by philanthropies, such as Ashoka, to support economic development in deprived communities in emerging economies, social enterprise investing often takes the form of short-term loans to seed-stage businesses and individual entrepreneurs. Grants and other forms of philanthropic support, such as advice, training for businesspeople and market-building programs, are often combined with financial support. Distinct from impact investing and SRI, social enterprise investing does not necessarily seek to generate a financial profit.
Social enterprise investing is associated with the microfinance movement championed by Muhammed Yunis. In recent times, governments and social enterprise incubators, like Nesta, have begun to use the tools of social enterprise investing to encourage innovation and growth in industries in the developed world, for example supporting businesses in renewable energy.
Crowdfunding usually involves using web-based technology to allow small investors to invest their money directly in businesses in exchange for a reward determined by the investee. Investors browse sites such as Trillion Fund to select investments and use online payment facilities to send money. Their reward may be in the form of financial profit, such as an annual dividend or equity stake in the company, or in some other form, for example, an item the business is selling. Crowdfunding platforms, like the solar funding platform Mosaic, specialize in specific industries. Others, like Abundance, offer a range of investing opportunities.
Our list of definitions is not exhaustive (our alert readers will let us know what we’ve left out) and it’s probably not uncontroversial (again, we look forward to to hearing from you) but it does demonstrate the range of options available to social investors. It also holds important clues about the current state of social investing. For more on this, keep an eye out for our next blog on the options open to social investors.
For more information on Social Investing check out our Infographic.
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