August 31, 2023

5 min read

Investment and Life insurance

Socially responsible investors: who are they and how do they invest?
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FWU - Expert Corner - FWU AG

  • Socially responsible investors

  • Sustainable investments

  • Sustainable and responsible investments

  • Ethical investments

In recent years, the financial world has undergone a - to put it mildly - revolutionary change, especially in the field of investment.

For some time now, the focus has progressively been shifting to sustainability as a key concept alongside profit, which used to be the uppermost consideration.

Unlike before, investors no longer simply look at returns but also at the environmental, societal, and ethical impact of their investments, as they have become more aware of the need to steadily combine capital growth with sustainability.

Who are the socially responsible investors?

Responsible investment is made possible thanks to strategies that integrate a purely financial analysis with the non-financial side of things, i.e. a societal, ethical, and ecological analysis.

This is one of the objectives socially responsible investors keep in mind at all times, for they are determined to invest in sustainability, and are very much aware that their choice not only contributes to a better living environment but can also have a significant impact on the choices business make and the practices they implement.

In consequence, socially responsible investors tend to exclude businesses that operate in certain sectors, such as oil companies or manufacturers of weapons, alcohol, tobacco products, etc.

They prefer to invest in securities that combine the more traditional criteria with environmental, societal, and ethical criteria.

Sustainable investors also focus on “impact investing”, i.e. investments made with the intention of, alongside a financial return, generating a positive and measurable impact on the environment and society.

Profile of a sustainable investor

Sustainable investors can be defined by means of a profile description, and this - in Italy’s case for example - on the basis of the CONSOB (Italian Companies and Exchange Commission) indications.

A reading of the third sustainable finance journal, published in November 2022 and entitled: “Interesse verso gli investimenti sostenibili. Un esercizio di caratterizzazione degli investitori italiani” [Interest in sustainable investment. An exercise in characterizing Italian investors], tells us that the people most interested in green investment are highly educated women.

The typical sustainable investor has a monthly income of between 1,200 and 3,000 euros and a financial wealth ranging between 10,000 and 50,000 euros.

Another distinctive aspect is their financial literacy, combined with an aversion to risk which is commonly not particularly high but rather on the average side.

Two other aspects that play a positive role in their interest in sustainable investments are investment experience and portfolio diversity.

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Sustainable investments

For a more detailed picture of who these socially responsible investors are, we look at several types of investment that all revolve around the central theme “sustainability”.

Starting point is a very simple question that will lead us to the crux of the matter: what are sustainable investments?

According to the European taxonomy, introduced by Regulation (EU) 2020/852, an investment can be qualified as sustainable if it meets at least one of the European Union’s six environmental objectives, does not have a negative impact on man or the environment and offers a few minimum social guarantees.

Sustainable investment is usually abbreviated in one of the two following ways: SRI (which we will discuss later) and ESG.

The latter acronym stands for Environmental, Social and Governance and is used to refer to environmental, societal, and good governance-related factors.

Environmental criteria relate to how a company deals with certain issues such as waste, pollution, and climate change, to name just a few.

Societal criteria refer to the way a company or country treats its people, while the factors in matters of good governance relate to the rules and strategies on the basis of which a business is run.

Anyone who decides to invest sustainably will keep the ESG criteria in mind to assess the social impact and sustainability of their investment.

To get a detailed, objective, and transparent picture of a company’s performance in terms of the environment, society, and good governance, FWU developed a rating system based on the ESG criteria, which scores a company’s overall sustainability on a scale from 0 to 100.

These days, there is a broad and diversified range of ESG products on the market that investors can choose from, and sustainable funds are definitely one of the most popular as they feature companies that effectively meet specific criteria with regard to society, the environment, and good governance.

Examples of sustainable investments are investments in microfinancing, which makes access to credit more straightforward and diversified, but also in social bonds, including investments in companies that produce energy from renewable sources.

Sustainable and responsible investments

In the context of sustainable investment, we also used the acronym SRI, which stands for Sustainable and Responsible Investment. In 2013, the Sustainable Finance Forum working group defined SRI investments as “creating value for the investor and society as a whole by means of a medium-term investment strategy that supplements the financial analysis of companies and entities with an analysis of their performance from an environmental, societal and good governance point of view”.

The acronym SRI is also used to refer to socially responsible investments that aim to link financial returns to the social good.

These are types of investments which, aside from financial performance, also aspire to generating added value from an environmental and societal perspective.

Investing in a socially responsible manner can be achieved by opting for individual companies or by purchasing SRI funds, i.e. socially responsible funds.

These are managed savings funds featuring companies and entities that have adopted and live by a few ethical principles, either or not shared by the investors.

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Ethical investments

Sustainability also covers ethical investments, which, aside from pursuing a return, allows investors to invest in funds whose ethical values tally with that of the investor, whether at a moral, religious, or societal level.

In other words, ethical investments are investments where the investor chooses how he invests his capital based on personal ethical criteria.

Giving an unambiguous definition of the concept 'ethical investment’ is easier said than done, but by way of reference we will adopt the one the Italian Asset Management Association (Assogestioni) has suggested.

The Classification Guide of the Italian Asset Management Association qualifies a fund as ethical if it has an investment policy that bans and/or gives preference to the purchase of securities on the basis of criteria other than a mere maximisation of expected returns and/or that follows an investment process based on principles other than a pure maximisation of expected returns”.

The adjective “ethical” actually stands for a relative concept that supposes many nuances.

Thus, it is no coincidence that both sustainable investments and socially responsible investments are classed at ethical investments.

In general, ethical investment is the preferred option for people who pursue specific values and want to contribute to the collective good and, in particular, want to have a positive impact on the environment and society.

Like in the case of SRI, ethical investments take place via ethical funds that include certain securities based on ethical and moral criteria shared by the investor in the portfolio.

In sum

Socially responsible investors:

  • aim for a return and sustainability

  • have a selection of investments to choose from

  • can have an impact on society

Good to know

Sustainable investors and socially responsible investors come under the common denominator of ethical investors.