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Alternative financing is key to designing socially responsible investment strategies to achieve a return on savings
Climate change, digitalisation, the profound transformation of the labour market associated with it, ageing, social inequality… All these processes mark the day-to-day life of our societies and pose a series of challenges that we cannot ignore. Beyond the responsibility of public administrations in managing these issues and the driving force of the productive fabric, investors can also contribute to our societies’ successfully overcoming these challenges. How? By designing socially responsible investment strategies (SRI).
How do you design socially responsible investment strategies? Firstly, by including principles such as sustainability or social commitment in the investment objectives, combining these criteria with financial criteria (obtaining a return, risk threshold to be assumed). Secondly, investing in financial products is committed to environmental, social and governance (ESG) factors. Thirdly, by reinvesting the profits generated in sustainable projects and thus consolidating socially responsible investment strategies over time.
Next, we will analyse how investment strategies can be designed and implemented to transform the productive fabric and positively impact the world and society.
The SRI-ESG binomial
In the introduction to this article, we mentioned two acronyms essential to understanding how socially responsible investment strategies work: SRI and ESG. Concerning SRI, the link is evident since these acronyms refer to the concept of socially responsible investment. In other words, an investment is not only focused on obtaining a return but also pursues other objectives linked to values such as sustainability.
While ESG is an acronym that contains three factors that are becoming increasingly important for companies: environmental, social and governance.
Why do both concepts go hand in hand when designing socially responsible investment strategies? Because ESG criteria are an excellent tool for assessing whether or not a company you wish to invest in meets SRI objectives.
Through these factors, it is possible to analyse whether a company carries out good environmental practices, implements initiatives to improve the quality of life of citizens or complies with the principles of good governance and is transparent.
Therefore, when designing socially responsible investment strategies, it is essential to consider ESG criteria to assess whether the financial products to be acquired are committed to companies that comply with them.
The growing importance of sustainable investments
If there is a critical problem for the planet, it is undoubtedly the climate crisis. That is why socially responsible investment strategies are strongly linked to sustainable investments. In other words, products that finance companies that carry out their activities sustainably contribute to the transformation of our economic model and the preservation of the environment.
Sustainable investments are not an ideal but a reality. The figures speak for themselves.
According to the Global Sustainable Investment Alliance (GSIA), global sustainable investments in 2020 amounted to 35.3 trillion dollars. The organisation also claims that 35.9% of assets under management in 2020 were sustainable investments, which shows the impact of socially responsible investment strategies on the financial market.
The rise of sustainable investments in recent years, increased social awareness and public policies (such as the SDGs and the 2030 Agenda) allow us to venture into those socially responsible investment strategies that are not a fad but will be adopted by all types of investors, from small savers to large investment groups.
As such, the financial sector will play a key role in supporting innovative and socially and environmentally sustainable projects.
Socially responsible investment strategies: Combining financial and extra-financial criteria
When we talk about socially responsible investment strategies, we are not referring to donations or solidarity contributions.
It must be clear that designing and implementing socially responsible investment strategies is not a matter of pure altruism. Investors who opt for this type of investment strategy are looking for a return on their money.
So how do socially responsible investment strategies differ from traditional investment strategies? They consider financial criteria and add other extra-financial factors (ESG) to the equation.
Thus, in addition to taking into account the profitability of a financial product, its level of risk or the return period of the investment and the profitability obtained, attention is paid to the environmental, social and corporate transparency commitment of the company in which the investment is to be made.
In this way, investors who choose to design socially responsible investment strategies not only obtain an economic benefit but also contribute with their money to transforming the production model and supporting environmentally and socially sustainable projects.
Types of SRI financial products
Currently, there are numerous types of financial investment products. Most of them can adopt the values and objectives of socially responsible investment and can therefore be used by people who wish to design socially responsible investment strategies.
As a result, SRI alternatives to classic financial products already exist in the financial sector, combining both economic and extra-financial criteria:
- Investment funds
- Pension plans (personal and occupational)
- Life insurance
- Venture capital companies and funds
- Ethical banking loans, deposits and microcredits
- Crowdlending, crowdfactoring or crowdequity
Therefore, nowadays, any investor can look for financial products to implement socially responsible investment strategies. Since the classic products have been transformed to add to the financial criteria, extra-financial factors such as compliance with ESG criteria by the companies seeking funding.
What socially responsible investment strategies can we design?
Just as there are multiple alternatives for designing traditional investment strategies, the same is true for SRI strategies.
In any case, here are eight types of socially responsible investment strategies that you can combine to get a return on your money while helping to build a more sustainable and less unequal society.
Investing in ESG-compliant companies
Many SRI investment funds and pension plans focus on investing solely and exclusively in companies that meet ESG criteria.
In this way, investors who choose these investment vehicles are assured that their money will be used to support environmentally and socially responsible companies governed by principles of good governance and transparency.
Exclusion of controversial sectors
Some investment funds, pension plans and individual investors also exclude companies in controversial sectors from their socially responsible investment strategies. For example, tobacco companies, bookmakers or arms companies that manufacture landmines.
These kinds of socially responsible investment strategies do not seek to support sustainable or socially committed companies but focus on excluding companies that do not comply with the tenets of ethical investment.
Many investors and investment funds focus their socially responsible investment strategies on crucial themes: renewable energies, energy efficiency, water management, sustainable transport, smart cities, organic and sustainable agriculture, etc.
In this way, investors have a better understanding of the type of projects in which they are investing their money and can also contribute to boosting a sector that they consider crucial for the present and future of our societies.
Take, for example, a person who is particularly aware of droughts and water supply problems. When it comes to investing his savings, he may choose to design socially responsible investment strategies to finance projects related to intelligent water management. On the other hand, another investor, who lives in a large city and is concerned about pollution and mobility issues, may wish to invest in innovative companies that improve mobility by reducing polluting emissions.
Involvement in investee companies
Fixed-income financial products such as bonds or loans are excluded from these socially responsible investment strategies. However, there are equity products that allow proactive participation in governance and decision-making. For example, consider an SRI investment fund that is part of a company’s shareholding.
Through this active participation, a company can be encouraged to integrate ESG criteria and implement sustainable activities that positively impact society as a whole, for example, by reducing its polluting emissions or ensuring beneficial working conditions and facilitating the reconciliation of work and family life.
Going for Best in Class companies
The Best in Class concept refers to companies that best implement ESG criteria within their economic sector.
Therefore, socially responsible investment strategies that focus on investing in Best in Class companies aim to support organisations that achieve the best results in sustainability indices.
In this way, it facilitates financing companies that have made the most significant efforts to be environmental, labour and socially sustainable to the detriment of other companies in their sector that present more modest results.
In recent years, the ethical banking model has been consolidated. These entities offer traditional financial products such as deposits, investment funds, bonds or loans. However, the key lies in the way the money is used.
Investors’ financial resources are used to finance sustainable or socially valuable projects. For example, microcredits enable middle-aged women to start businesses in rural areas.
Social impact bonds
Savers interested in designing socially responsible investment strategies can also take out social impact bonds or green bonds.
How do these bonds differ from traditional bonds? They focus on the outcome of the investment.
These bonds aim to facilitate impact investments by setting targets to be achieved through the acquisition. If the public administration, NGO or private entity in question reaches the objectives, the investor will obtain an inevitable return. In such a way, the economic benefits for the investor depend on the success of the organisation in which it invests. If only one objective is achieved, the return will be lower than if all goals are met.
These socially responsible investment strategies are more complex than others discussed in this article, but they also have direct impacts that external and independent evaluators must quantify.
Alternative financing: Decide in whom you will invest your money
We leave for last a financing modality that has grown at the same pace as SRI: alternative online financing through crowdlending, crowd factoring or crowd equity platforms.
Marketplaces such as Inversa Invoice Market allow savers to easily access the financial sector and use their money to invest in actual economy companies and innovative projects committed to the local social fabric and the environment.
One of the key features of alternative financing platforms is that they give investors full autonomy to decide where and in whom they invest their money. In Inversa, savers have all the financial information on the invoices offered (profitability, credit rating, expiry date…) and know perfectly which companies they invest in. This way, they can document themselves and their compliance with ESG criteria before implementing their socially responsible investment strategies.
In short, the rise of alternative online financing and the evolution of traditional investment products by introducing extra-financial criteria now make it possible for any investor, regardless of their financial resources, to design and implement socially responsible investment strategies successfully. This means that small savers can obtain a return on their money while at the same time contributing to building a fairer and more sustainable world.