“Creating a strong business and a better world are not conflicting goals. They are both essential ingredients for long term success.” Bill Ford

What is Ethical investing? Investopedia defines ethical investing as the practice of using one’s ethical principles as the primary filter for the selection of securities. This is as good a definition as any. It is an acknowledgement that we vote with our wallets with just about every financial decision we make.

If you’re serious about “voting with your wallet”, building a well diversified portfolio of investments to achieve your financial goals, and you want to improve the quality of our planet and the people that inhabit it, you are going to need to learn about SRI and ESG .

SRI is simply Socially Responsible Investing. 

Socially Responsible Investing, at the risk of grossly over simplifying and to draw a clear distinction between SRI and ESG, is about excluding certain types of companies from your portfolio. For example, making a decision not to invest in Tobacco, Alcohol, and Firearm companies.

ESG refers to the Environmental Social and Governance score of an investment.

Environmental

• includes climate change policies, greenhouse gas emission goals, pollution and emission plans, usage of renewable energy, adoption of green policies for products, infrastructure, technology, etc.

Social

• relates to company culture. How it treats its employees, suppliers, and customers. This includes employee pay, benefits, turnover, social mobility, diversity, and safety policies. -Including harassment prevention. It also includes ethical supply chain sourcing and a clear mission.

Governance

• has to do with how well a company is managed when we consider the various stakeholders. Is executive compensation aligned with the long term success of the business? Do shareholders have a say in the composition and compensation of the board? What is the regulatory track record of the company?

ESG gives us a set of criteria to consider when choosing an investment. Put another way, a framework from which to determine how companies actually score and how the factors affect your investment returns.

Personally, I prefer to focus on ESG because it allows us to measure not only how a company is executing, but its trend. Consider the case of an energy or automobile company. Within an SRI framework we might disqualify them from consideration. Fossil fuels are not great for the environment. Cars that burn fossil fuels are not great for the environment. Historically, these companies score poorly when it comes to the E in ESG. If we take an ESG approach and look at the behaviour of some companies over time, we might find they are improving. New capital expenditures may focus on renewable energy or new technologies are embraced to reduce the damage to the environment. Initiatives within the company might allow employees to promote from within and develop the skills they need to move into senior roles. The mission statement may reflect these changes. For example, Bill Ford’s statement as quoted above. Best practices pressure peers to adopt the same. An improving score might lead a money manager to a new opportunity where once there was none.

A large SRI/ESG fund might accumulate enough shares to vote someone onto the board with values that further improve the culture of a large organization. Accelerating the rate of change from within.

Interested in Ethical investing? In rewarding best in class organizations with your investment dollars?

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