Social Investing: What Is It?

In recent years, social investment has received a great deal of attention – particularly following the financial crisis. However, most people wonder: What is social investment? Let’s reply to that question.

We must first consider how traditional investors look at the world to understand what social investments are. In traditional investments, investors weigh investment decisions by taking two significant factors into account: risk and financial return.

Risk, returns and social consequences

Each investor has a certain level of comfort across the spectrum of risks and returns and invests within that spectrum. If an investment is safer, an investor may be comfortable giving up some of its returns. On the other hand, if it means a higher return, the same investor might be willing to take a bit more risk with an investment.

A third factor – social impact – is taken into account in social investment. Social impact means that the investment-backed company benefits society beyond the revenue that it generates for investors. In contrast, a company can also adversely affect the community, and a social investor can take this into account when making investments.

Just as traditional investors are prepared to compromise risk and return, social investors are willing to deal with the threat, return and social impact. Suppose, for example, that a company does something that improves the environment. In this case, a social investor may be prepared to relinquish a specific financial return or assume greater risk depending on its comfort level.

In short, social investment can be defined as considering the social impact of an investment company. By this standard, several approaches to investment fall within the scope of social investment: Investment mission, responsible investment, double-bottom line investment, triple-bottom-line investment, ethical investment, sustainable investment and green investment.

Social Selection

There are two broad categories within the universe of social investment: social screening and impact investment. An investor comes with a list of social standards that his assets want to meet in the social screening methodology.

The investor eliminates any enterprise that does not meet these standards and invests in the “socially responsible” enterprises that meet these criteria to meet the investor’s risk and return objectives.

Several socially responsible mutual funds that use this approach have emerged. They adopt a social screening methodology, define a broad investment basket that complies with these standards, and then invest their management firm in that basket to meet the mutual fund’s financial objectives.

Investment impact

The second broad category of social investment is known as impact investment, or community investment, sometimes. Investment in companies that do social good instead of investing in companies that do no harm is made.

Companies falling under the impact heading of the investment perform services with a charitable or social purpose and a business model that can generate revenue and support a financial investment. They encompass both the world of charity and business.

Impact investment enterprises may be structured as non-profit or profit-making enterprises, but they rarely take the form of large, public enterprises listed on capital markets. As a result, impact investments are more complex and often involve private investments in a bill or loan.

Sectors of Investment Impact

So, precisely what are these impacts on investment firms? Let us look at some of the sectors that qualify to make better sense as impact investments.

Affordable housing is one sector most people know about. Most people support an organization such as Habitat for Humanity through donations. Nevertheless, a foundation, for instance, could help them with a low-interest loan to finance projects of the organization.

Another impact of the investment sector is microfinance. A micro-finance agency makes small loans to entrepreneurs in developing countries to start or grow their businesses and get out of poverty. A bank-like microfinance institution can generate income and support investors.

Many other similar sectors generate revenue and have a central social mission: fair trade, community development organizations, social companies, etc. In every industry, companies can often find investors willing to give up financial returns or take a little more risk due to their social impact.