This article first appeared in Personal Wealth, The Edge Malaysia Weekly on July 10, 2017 - July 16, 2017
Social investing is an umbrella term for providing finance to the social enterprise sector using multiple instruments and methodologies to seek social and financial returns.
Social investing dates back to 1758, when the the Religious Society of Friends (Quakers) prohibited its members from participating in the slave trade. Modern social investing evolved with the political climate of the 1960s, when economic development projects managed by Dr Martin Luther King established the model for future responsible investing efforts.
Today, there are various social investing approaches with different methodologies and goals. Terms used include “ethical”, “green”, “socially responsible”, “impact”, and “sustainable”. According to the Social Investment Landscape in Asia report, published by the Asian Venture Philanthropy Network and Sattva in May 2017, social investment comprises 43.6% of the portfolio of Malaysia’s high-net-worth investors.
Bursa Malaysia launched one of Asia’s first environmental, social and governance (ESG) indices, the FTSE4Good Bursa Malaysia (F4GBM) index in 2014.
Below, we summarise some of the better known types of social investing.
DID YOU KNOW?
Malaysia fell to No 22 on the World Giving Index 2016 from No 10 in 2015.
SOCIALLY RESPONSIBLE INVESTING
Socially responsible investing (SRI) is a discipline that uses a set of ESG criteria to choose companies for investment. A strategy such as negative screening is used, whereby companies that do not fit the criteria are ruled out. Such companies may be involved in tobacco, pornography, alcohol, arms or logging activities, for example.
SRI covers a growing range of products and asset classes, including cash, fixed income, and alternative investments such as private equity (PE), venture capital and real estate. There are also socially conscious mutual funds and exchange-traded funds (ETFs) available to SRI investors.
Community investments are those made directly into low-income or underprivileged communities through multiple channels, including community development banks, credit unions, loan funds, venture funds, and microfinance institutions. There is also an increasing availability of fixed income and PE products for community investing.
The investment focuses on economically improving underprivileged communities by offering banking services and small loans to fund initiatives, small businesses and non-profit organisations. Areas associated with community investments include education, affordable housing and infrastructure development.
SOCIAL ENTERPRISE INVESTING
Social enterprise investing is typically done to support the growth of businesses with a positive social or environmental impact. It takes the form of short-term loans to seed-stage businesses and individual entrepreneurs. Other forms of philanthropic support, such as advice, coaching and market-building programmes, are often combined with the financial support given. This type of social investing does not necessarily seek to generate a financial profit.
Investments made in companies or projects committed to the conservation of natural resources are known as green investments. This includes the implementation of clean air and water projects, environment-conscious business practices and the production and discovery of alternative energy sources. Investors can build their green portfolio with securities, mutual funds, ETFs and bonds.
Impact investing is an investment intentionally made to create both financial and social returns (alongside, not instead of) that are actively measured. It targets financial returns that range from below market to risk-adjusted market value, and can be made across asset classes including but not limited to cash equivalents, fixed income, venture capital and PE.
For impact investing, the publication of reports is required to measure the social and environmental performance, proving whether the impact has been achieved. This is done to ensure transparency and accountability for the investments made.
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