Socially responsible investing considers ethical and social factors when deciding which companies to invest in, with exclusionary and activist investing being the main types. Community investing is also an option. Critics argue that it is often ineffective.
Socially responsible investing is a method in which investors use criteria based on the potential ethical or social ramifications of investments to decide which companies to invest in. Traditional investing tends to primarily consider the potential financial gain from particular investments. Proponents of socially responsible investing may simply avoid investing in companies that deal with products or issues that they are morally opposed to. They may also buy mutual bonds or company shares in the hope of creating what they see as positive change.
Exclusionary investing is one of the main types of socially responsible investing. Investors may decide not to give money to companies if they disagree with their business philosophies. This may be due to the type of products, such as firearms, pornography, or alcohol. Investors can also decide to exclude individual companies if they believe the companies are using unfair business practices, such as child labor. Exclusionary investing is based on the notion that refusing to invest in particular companies will cause them to lose profit and be forced to change.
Activist investing is the other main type of socially responsible investing. Investors using the approach look for companies that promote products or issues with which they agree politically or morally. They try to help companies become more powerful and be able to continue with their goals. Activist investing can also take the form of investors buying shares in companies they oppose in order to become shareholders. Since investors would become co-owners, they could participate in shareholder meetings and try to change company policies from within.
The socially responsible investing process begins with an investor reviewing potential companies. He or she analyzes the size and policies of the company to decide which methods will be most effective for certain companies. For example, an investor may decide that using an activist strategy and becoming a shareholder may bring about change in smaller corporations.
In addition to buying company stocks or bonds, an investor may choose to participate in community investing. This type of socially responsible investing involves giving money to a local community investment group. It differs from a charitable gift in that the pool promises a fixed interest payment to the investor after an agreed period of time. Community investment money is typically used to fund local projects, such as helping small businesses or starting projects to assist low-income clinics.
Critics of the socially responsible investment strategy argue that it is often ineffective. They feel that companies do not lose profits just because some investors do not invest with them due to moral reasoning. Critics also argue that activist investing takes too long to make even small changes to the company’s business policies.
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