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Not all investors are focused on profitability. It may sound counterintuitive unless you are familiar with the socially conscious philosophy. Your financial behavior may put principles before profit. The focus is shifted to environmental protection, animal rights, and fair treatment of employees. In Nigeria, this kind of investing is only emerging.
The responsible approach is especially popular with millennials. Since 2012, the use of such strategies has almost doubled, according to The Forum for Sustainable and Responsible Investment. This concept does not apply to Forex trading, but it is fully applicable to stocks, CFDs, ETFs, and indices, as these are linked to corporate performance. So, what is it all about?
Definition of Socially Responsible Investing
Conscious investors prioritize the environmental and social impact of the companies they support. The ESG criteria are at the heart of this philosophy: it includes three elements — environmental, social, and governance. Suppose you need to decide which CFDs to buy through Forextime. Here is what you would consider (to learn more about the instrument, read what are CFDs).
The Environmental Component
The first component is the company’s impact on the environment. Good practices include:
? conservation of natural resources,
? renewable energy,
? absence of polluting buildings and equipment,
? repurposing of waste, and
? humane treatment of animals.
It is also crucial to consider the corporation’s past. Has it been involved in any environmental blunders? For instance, British Petroleum had to deal with a major oil spill a while ago, and the company’s reaction was a tremendous PR disaster.
The Social Component
This factor concerns the company’s relationships with its customers, staff and other stakeholders. Are its actions driven by greed, or do they truly care about their customers’ experience? Does the company help the local community? Does it hire graduates of local colleges?
Treatment of employees is a telling sign. Find out what conditions they work in. What are the benefits and work-life balance like? To find this information, you could research social media and dig into corporate reports.
The Governance Component
How transparent are the company’s operations? Governance concerns a plethora of ethical issues. These include payroll, bonuses for top management, internal audits, etc. Assessing the situation is hard. Some organizations follow legal guidelines only on the surface. In reality, they exploit loopholes and engage in shady practices.
Socially responsible companies set internal guidelines to hold themselves accountable. These controls may be more rigid or lax than legal requirements. For the most part, this information is found in documents submitted to the SEC.
Is There a Shortcut?
For novices, the idea of digging through such an immense volume of information is daunting. Fortunately, there is a quick way to understand whether a company is socially responsible. Investment firms do this job for you when they compile socially conscious ETFs and mutual funds.
In the United States, the Morningstar investment research company has launched a special scoring system for these instruments. It allows investors to pick companies based on their ESG evaluations.
There Is a Catch
At the moment, over 150 funds focus on socially conscious organizations. Collectively investing, they are worth over 135 billion dollars. However, investors should be wary.
Do not jump into a fund because it is labeled as socially responsible. Unfortunately, some indexes presented as ESG-friendly contain businesses that should not really be included, such as Pepsi or McDonald’s. They aren’t fully composed of companies that run on renewable energy and recycle their waste. Obviously, the industry needs time to catch up.
Secondly, research the performance history of your fund. While these instruments vary, and you cannot predict their future with perfect accuracy, statistics are available. Financial experts have seen ESG funds underperform against their standard counterparts like S&P 500.
So What Should I Do?
Whether to choose profits or ESG is up to you. Socially conscious investing is very different from the conventional view. It is not the performance but the impact on the environment and society that comes first. You invest in organizations that protect the environment and treat humans and people fairly.
Naturally, being responsible could mean choosing less profitable options. This decision should be motivated by your own vision, not somebody else’s. If you are in two minds, consult an investment expert.