What is socially responsible investment (SRI)?

We'll explain what socially responsible investing (SRI) is and describe its main characteristics
Socially responsible investment (SRI) is a style of investment which takes into account environmental, social and governance criteria (known as ESG criteria). Its main objective is to contribute to sustainable development, defined for the first time in 1987 as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.
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Are all SRI funds the same?

In short, no. This type of investment involves different strategies or approaches that can be classified as follows:

  • Exclusion: companies from certain industries that may be contentious or unethical, such as tobacco and gambling, are excluded. It is very common to exclude companies that manufacture landmines and/or cluster bombs.
  • Integration of ESG factors - environmental, social and governance criteria - in the investment processes: this involves taking ESG criteria into account when assessing a company's profits or future payment capacity. As such, under equal conditions, the manager will choose whichever stock, in the case of equities, or whichever bond, in the case of fixed-income, has the best assessment in terms of ESG criteria.
  • Shareholder voting (only in equities) and engagement: proactively collaborating with the companies or governments in which the fund invests in order to trigger and encourage improvements in ESG aspects. Some examples may include encouraging entities to invest in reducing polluting gases, or to apply best practices in long-term executive remuneration.
  • Norm-based screening: avoiding investment in companies or governments that breach international regulations or treaties. The most popular of such treaties is the United Nations Global Compact, which consists of 10 principles grouped into 4 major blocks: human rights, labor, environment and anti-corruption. For example, a company or government could be excluded if it exploits child labor.
  • Best in class: companies (or governments, in the case of governmental bonds) are scored based on their policies on ESG issues, and only those with the highest scores will be invested in. This is what indexes that have sustainability labels usually do.
  • Focused on sustainability: funds that are related to a specific area of SRI, such as climate change or water sustainability.
  • Impact investing: investing in which the financial return is secondary, with the social component being more important, such as investing in a canteen for the poor. Due to the very nature of this strategy, more is usually given at a private level and it is difficult to find this strategy in fund format.

Each management company/product may apply a combination of several strategies, only implement one, or not apply any of them.

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How can I invest in SRI funds?

Of all the aforementioned investment types, the Socially Responsible Investment - SRI - fund label is usually given to those that focus on sustainability and the Best in classstrategy.

It is important to point out that although many investment funds do not carry the SRI fund label, they may still take one or several of those strategies into account when building their investment portfolios. In equities, for example, it is common to find funds that carry out one or several of the following actions: excluding companies that manufacture cluster bombs and landmines, actively using their voting rights in the general shareholder meetings, promoting best practices in ESG matters by having conversations with the companies or governments in which they invest, and applying ESG criteria to evaluate an investment.

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