Responsible investing (RI) is often mistakenly understood to mean investing only in companies that show absolutely no signs of environmental, social or governance risk. Such "perfect" companies are far and few between!
That's why investors have come up with 7 responsible investing strategies to encourage businesses to improve their practices.
Before selecting company stock
1. Exclusionary screening based on principles
2. Exclusionary screening based on international standards
3. Screening for environmental, social and governance (ESG) practices
4. Best-of-sector screening
5. Thematic investing
6. Social investing
After selecting company stock
1. Shareholder activism or engagement
While thematic and social investing are still fairly new strategies, shareholder activism shows the most promise for making the biggest impact on environmental, social and governance issues.
It involves direct engagement with the companies in an investment portfolio whose reporting, environmental management, social track record or corporate governance give cause for concern.
Slowly but surely
Bringing about change through socially responsible investing takes time and persistence. Discussions with companies may draw out over a number of years, but even a single improvement can pave the way for more.
It takes time to change practices. However, research confirms that every year, the results of SRI are becoming increasingly tangible.
As a last resort, an investment fund can also divest a company's stock, but in doing so, is effectively giving up on the change it has been fighting for and that SRI represents.
*Canadian Business Corporations Act