Investopedia: Socially Responsible Investment - SRI

Socially Responsible Investment - SRI
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DEFINITION of 'Socially Responsible Investment - SRI'

An investment that is considered socially responsible because of the nature of the business the company conducts. Common themes for socially responsible investments include avoiding investment in companies that produce or sell addictive substances (like alcohol, gambling and tobacco) and seeking out companies engaged in social justice, environmental sustainability and alternative energy/clean technology efforts. Socially responsible investments can be made in individual companies or through a socially conscious mutual fund or exchange-traded fund (ETF).
BREAKING DOWN 'Socially Responsible Investment - SRI'

"Socially conscious" investing is growing into a widely-followed practice, as there are dozens of new funds and pooled investment vehicles available for retail investors. Mutual funds and ETFs provide an added advantage in that investors can gain exposure to multiple companies across many sectors with a single investment. Investors should read carefully through-fund prospectuses to determine the exact philosophies being employed by fund managers.

There are two inherent goals of socially responsible investing: social impact and financial gain. The two do not necessarily go hand in hand; just because an investment touts itself as socially responsible doesn't mean that it will provide investors with a good return. An investor must still assess the financial outlook of the investment.

One example of socially responsible investing is community investing, which goes directly toward organizations that have a track record of social responsibility through helping the community and have been unable to garner funds from other sources, such as banks and financial institutions. The funds allow these organizations to provide services to their communities, such as affordable housing and loans. The goal is to improve the quality of the community by reducing its dependency on government assistance such as welfare, which in turn has a positive impact on the community's economy.
History of Socially Responsible Investing

Socially responsible investments tend to mimic the political and social climate of the time. In the 1960s, investors were mainly concerned with contributing to causes such as women's rights, civil rights and the anti-war movement. For example, Martin Luther King, Jr. played a large role in raising awareness for the civil rights movement by targeting companies that opposed the cause as socially irresponsible.

As awareness has grown in recent years over global warming and climate change, socially responsible investing has trended toward companies that positively impact the environment by reducing emissions or investing in sustainable or clean energy sources. Consequently, these investments avoid industries such as coal mining due to the negative environmental impact of their business practices.
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Social Impact Bond - SIB
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A social impact bond (SIB) is a contract with the public sector or governing authority, whereby it pays for better social outcomes in certain areas and passes on part of the savings achieved to investors. A social impact bond is not a bond, per se, since repayment and return on investment are contingent upon the achievement of desired social outcomes; if the objectives are not achieved, investors receive neither a return nor repayment of principal. SIBs derive their name from the fact that their investors are typically those who are interested in not just the financial return on their investment, but also in its social impact.
BREAKING DOWN 'Social Impact Bond - SIB'
Rationale of Social Impact Bonds

Social impact bonds tend to be risky investments, as they are entirely dependent upon the success of the social outcome. Unlike normal bonds, social impact bonds are not affected by variables such as interest rate risk, reinvestment risk, or market risk. However, they are still subject to default and inflation risk. It can be hard to determine the success of social impact bonds, as they are based on social impact, which is often not quantifiable and it's hard to measure success. There are many more variables than regular bonds, which are comparatively easy to measure because they are based on hard data. For this reason, it's hard for social impact bonds to get government funding.
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