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What Is Socially Responsible Investing?

Investors may decide not to support a company that participates in child labor practices.
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  • Written By: Allison Boelcke
  • Edited By: Bronwyn Harris
  • Last Modified Date: 26 November 2014
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Socially responsible investing is a method in which investors use criteria based on the possible ethical or social ramifications of investments to decide what companies to invest in. Traditional investment tends to mostly consider the possible financial gain of particular investments. Advocates of socially responsible investing may simply avoid investing in companies that deal with products or issues they are morally opposed to. They can also purchase mutual bonds or stocks from companies in the hopes of creating what they feel is positive change.

Exclusionary investing is one of the main types of socially responsible investing. Investors may decide to not give money to companies if they don’t agree with their business philosophies. This can be due to the type of products, such as firearms, pornography, or alcohol. Investors may also decide to exclude particular companies if they feel the companies use unfair business practices, such as child labor. Exclusionary investing is based on the notion that refusing to invest in particular companies will make them lose profit and be forced to change.

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Activist investing is the other main type of socially responsible investing. Investors who use the approach seek out companies that promote products or issues they politically or morally agree with. They try to help the companies become more powerful and be able to continue their goals. Activist investing can also take the form of investors purchasing stocks of companies they are opposed to in order to become shareholders. Since the investors would become part-owners, they could take part in shareholders meetings and try to change the companies policies from within.

The process of socially responsible investing begins with an investor reviewing potential companies. He or she looks at company size and policies to decide which methods will be most effective for particular companies. For instance, an investor may decide that using an activist strategy and becoming a shareholder may be more likely to evoke change in smaller corporations.

In addition to purchasing stocks or bonds of companies, an investor can choose to participate in community investment. This type of socially responsible investment involves giving money to a local community investment group. It differs from charitable donation because the group would promise a set interest payout to the investor after an agreed upon period of time. The money in community investment is typically used to fund local projects, such as aiding small businesses or starting assistance projects for 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 don’t invest with them due to moral reasoning. Critics also argue that activist investing takes too long to make even small changes to company business policies.

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