5 Principles of Successful Socially Responsible Investing

Socially responsible investing is a term that describes an investment strategy where the investments are used towards some social good while bringing profit to investors. This can include investments that deal with everything from advancement of human rights to environmentally friendly sources of energy. Another important facet of social investing is that the investment strategies themselves must be ethical and beneficial to everyone involved. The concept of socially responsible investing can encompass a wide variety of strategies, but if they must all share certain common principles that help to ensure that the above-mentioned goals are successfully achieved.

1) Define Goals and Objectives

As mentioned above, socially responsible investing can encompass many areas. In order for their socially responsible investing strategy to be successful, investors must agree on what they are willing to invest in and what they hope to achieve. This can include what fields they will invest in, what kind of profits they hope to achieve and which fields they will avoid. A common set of goals and objectives ensures that the strategy will remain cohesive and that all investors will be equally involved.

2) Practice Negative Screening

Negative screening is the screening of potential investment assets to ensure that they don't cause harm to society and/or the environment. While the particulars of negative screening vary, it tends to avoid investments in similar areas. This includes investments in anything that has to do with adult entertainment, the manufacturing of addictive substances such as alcohol and tobacco, gambling, polluting power sources and the manufacturing of weapons.

3) Invest Positively

Positive investing is a flip side to negative screening. While negative screening seeks to avoid investments that conflict with the goals of socially responsible investing, positive investing refers to investors making a deliberate effort to find investment opportunities that match their social and environmental values. In addition to making profit for the investors, positive investing is meant to reward socially active and/or environmentally friendly companies and encourage other companies to follow their lead. Oftentimes, this includes investing in foreign companies that are based in countries with troubled human rights or environmental records.

4) Monitor Existing Investments

Just because the investments originally passed the negative screening doesn't necessarily mean that they will remain socially and environmentally friendly. Corporate leadership can change, and the new leaders may not be as inclined to follow socially conscious policies as their predecessors. This is why investors must keep an eye on their investments. Establishing and maintaining conversations with corporate management of the companies in questions go a long way towards achieving that. However, if the dialogue fails, investors are better off divesting from the companies that no longer fit their values.

5) Keep Your Eye on the Profit Margin

While social responsibility is an important facet of socially responsible investing, it should not come at the expense of profits. Just because a company is socially responsible companies doesn't mean it is immune from making faulty financial decisions. Investors will inevitably lose money somewhere along the way, but they shouldn't feel obligated to keep investing in money-losing companies forever. This is why investors must pay careful attention to the returns their investments generate and cut their losses as quickly as possible.

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