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The Definition of Socially Responsible Investing:

The Definition of Socially Responsible Investing: “Ethical investment may be defined as the exercise of ethical and social criteria in the selection and management of investment portfolios, generally consisting of company shares (stocks). This contrasts with standard depictions of investment decision-making in finance textbooks, which concentrate solely on financial return in the form of dividends and capital gains, and risk…” (Cowton 1994:2

Many authors describe Socially Responsible Investing (SRI) as an investment philosophy that includes non-financial, ethical (e.g., social and environmental) objectives. In the words of Richard Hudson (2005:641), Socially Responsible Investing is a “non-financial normative criteria… in the choice of securities”. Mansley (2000:3) has described it as a process within the context of financial analysis, which takes into account social, environmental and ethical consequences when selecting, retaining, or realizing investments. Notably, Waddock (2003:369) portrays SRI as a community that encompasses a wide range of individuals and groups interested in criteria other than just return on investment.The quality of Cowton’s (1994) definition lies in confronting a conventional investment decision-making process with the one applied in Socially Responsible Investing.Cowton develops his definition even further by including sources of financial returns from investments to be the basis for concerns of ethical investors. Similarly, Social Investment Forum (2003:3) refers to such type of investing as a process that focuses on non-financial consequences of investments. However, by designating sources of financial returns as important factors, Cowton clearly demonstrates that SRI is not only about avoiding certain activities and consequences, but much more. Based on this assertion, Sparkes (2002) suggests that Socially Responsible Investing should be an investment philosophy that combines financial and non-financial criteria.

Types of Investments:There are many types of investments that will ensure you a safe and secure financial future. While investing money may not be rocket science, it definitely is a science that takes time, effort, and perseverance to master and produce true results. In this article, we cover the following types of investments:

Liquid Investments:Liquid investments are investments that could be turned into cash relatively easily and assume various forms, such as savings accounts, Certificates of Deposit, Money Market Accounts, and other interest-bearing accounts offered by banks. Normally, these types of investments are FDIC-insured and although they offer low rates of return, they are relatively less risky.

Bonds:Under the broad umbrella of bonds, we cover both savings bonds (Treasury Bonds) offered by the US government and corporate bonds issued by private corporations. The US Treasury is the largest issuer of savings bonds and normally these are very secure investment vehicles, given that they are backed by the United States Government — Uncle Sam. These savings bonds are easily sold at most banks and can also be directly purchased from the Treasury Department online. As investments, the savings bonds are safe and stand by their promise of providing fixed interest rates.

In addition to government bonds, corporate bonds represent another major chunk of investment vehicles. Normally, corporate bonds are rated by independent agencies based on the level of risk associated with their issuer. Much like government savings bonds, they are relative safe but do carry some risk, given that they are issued by private corporations — which are subject to loss, bankruptcy, and other risk-producing eventualities.

Annuities:The nuts and bolts of an annuity boils down to some very basic contracting. You, as the investor, pay a lump sum amount to the annuity issuer, typically an insurance company. At a pre-defined period, typically your retirement, the annuity would mature and start paying you a fixed amount every month. The advantage of an annuity is that you will not have to pay taxes until the annuity payments actually start accruing to you. Although considered low risk, annuity provides charge high fees and their success is largely dependent on the reputation and stability of the insurance company underwriting the annuity.

Stocks:A stock normally represents your ownership within the corporation. The advantage of holding a stock is that not only do you own a piece of the company, you also have the liberty to trade these instruments in an open market (and thus realize capital gains) and reap income in the form of dividends, which are declared when the company makes profits. Stocks, as an investment class, are very volatile and may be subject to sharp market fluctuations and uncertainty.

Mutual Funds:Mutual funds are a large aggregation of stocks, bonds, and other financial investments, except that they are managed by professional investors. The advantage of mutual funds is the possibility of diversifying your financial investment over a large pool of investments. Unfortunately, it is not easy to predict the risk and rate of return through mutual funds and depending on the professional expertise of mutual fund managers, the success is likely to vary.

Real Estate:For those who keep track of the real estate market, buying, selling, and renting property could be a viable financial investment. Not only will you realize capital gains if you invest in the right property, there is also the possibility of earning rental income. If you had purchased your property relatively early in your career, at retirement you may have paid off the property’s mortgage and so whatever rental income accrues is basically your profit (minus, of course, maintenance).

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MSc Economics and Management

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