What is Socially Responsible Investment?

458 reads · Last updated: December 5, 2024

Socially responsible investing (SRI) is an investment that is considered socially responsible due to the nature of the business the company conducts. A common theme for socially responsible investments is socially conscious investing. Socially responsible investments can be made into individual companies with good social value, or through a socially conscious mutual fund or exchange-traded fund (ETF).

Definition

Socially Responsible Investing (SRI) refers to the practice of considering a company's social responsibility performance in investment decisions, selecting companies that perform well in environmental, social, and governance (ESG) aspects. The goal is to achieve financial returns while promoting sustainable development in society.

Origin

The concept of socially responsible investing dates back to the 1960s, when social movements raised awareness about corporate social responsibility. Over time, especially in the early 21st century, SRI has evolved into a mature investment strategy, gaining increasing attention from investors.

Categories and Features

Socially responsible investing can be categorized into various types, including negative screening, positive screening, and impact investing. Negative screening involves excluding companies that perform poorly in certain areas, such as those involved in tobacco or weapons. Positive screening selects companies that excel in ESG aspects. Impact investing goes further by directly investing in projects or companies that aim to generate positive social or environmental impacts.

Case Studies

A typical case is Tesla, which is favored by SRI investors for its innovations in renewable energy and electric vehicles. Tesla's business model not only advances sustainable transportation but also promotes global attention to clean energy. Another example is Unilever, which is a popular choice among SRI investors due to its commitment to sustainability and social responsibility. Through its Sustainable Living Plan, Unilever aims to reduce its environmental footprint and enhance its social impact.

Common Issues

Investors often face challenges in measuring a company's social responsibility performance when engaging in socially responsible investing. A common misconception is that SRI might sacrifice financial returns. However, research indicates that many SRI funds perform comparably to, or even better than, traditional funds.

Suggested for You

Profit Centers

A profit center is a branch or division of a company that directly adds or is expected to add to the entire organization's bottom line. It is treated as a separate, standalone business, responsible for generating its revenues and earnings. Its profits and losses are calculated separately from other areas of the business. Peter Drucker coined the term "profit center" in 1945.

Profits Interest

Profits interest refers to an equity right based on the future value of a partnership awarded to an individual for their service to the partnership. The award consists of receiving a percentage of profits from a partnership without having to contribute capital.In effect, it is a form of equity compensation and is used as a means of incentivizing workers when monetary compensation may be difficult due to limited funds, such as with a start-up limited liability company (LLC).

Accumulated Depreciation

Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life. Accumulated depreciation is a contra asset account, meaning its natural balance is a credit that reduces the overall asset value.

Loss Carryback

Loss Carryback refers to the practice where a business can apply a net operating loss (NOL) incurred in the current year to previous tax years' taxable income, thereby potentially obtaining a tax refund for taxes paid in those prior years. This mechanism provides businesses with immediate cash flow relief during tough economic times. The specific rules and allowable periods for loss carryback vary by country. For example, in the United States, businesses can carry back NOLs to the previous two tax years. It is important to distinguish loss carryback from loss carryforward, which involves applying the NOL to future taxable income to reduce future tax liabilities.

Loss Carryforward

Loss Carryforward, also known as loss carryover, is a tax provision that allows a company to apply a net operating loss (NOL) to future taxable income to reduce tax liability in future years. Depending on the tax regulations of different countries, losses can typically be carried forward for a period ranging from 5 to 20 years, with some jurisdictions allowing for indefinite carryforward. This mechanism helps businesses mitigate tax burdens during tough financial periods, aiding in their recovery and growth.

Net Sales

Net sales is the sum of a company's gross sales minus its returns, allowances, and discounts. Net sales calculations are not always transparent externally. They can often be factored into the reporting of top line revenues reported on the income statement.