According to research, many corporations in the contemporary world have purposed to reorient their investment policies in line with the principle of the common good through responsible investment strategies. As a way of addressing the numerous challenges associated with globalization, responsible investment is one of the notable trends that corporations have taken up since the turn of the century. It refers to an investment approach that aims to integrate social, environmental, and governance elements into investment decisions with the sole purpose of improving risk management, as well as generating sustainable and long-term results.
The social elements integrated into investment decisions include improving employee relations, diversity, health, safety, working conditions, as well as conflict management. Environmental elements include deforestation, resource depletion, waste management, pollution, and climate change. Governance elements include issues relating to tax strategy, executive pay, political lobbying, corruption, as well as board diversity and structure.
The concept of responsible investment has been necessitated by several factors that relate to sustainability. One of the driving factors is the realization that social, environmental, and governance factors play a pivotal role in determining the risks that an investment attracts, as well as the returns made.
According to investment experts, corporations in the contemporary world have also felt the need to invest more responsibly as a way of managing the pressure of competitors who are differentiating themselves with a competitive advantage developed around responsible-oriented venture services. The culture of responsible investing has also been highly influenced by the growing pressure of shareholders who have chosen to take up a more active role in the running of corporations, as well as demanding transparency with regard to the way their money is being put into use.
In the recent past, there have been numerous debates seeking to develop a clear understanding of the exact manner in which an investor should practice responsible investment. According to experts, investors have a wide variety of approaches to choose from if they want to incorporate the concept of responsible investing into the decision-making process. It is important to note that the strategy chosen is often guided by the nature and intensity of corporate social responsibility programs a corporation has chosen to implement.
One of the most effective approaches is using the voting rights of shareholders to influence a corporation’s behavior. Investors can also integrate information about the social, environmental, and governance elements into the quantitative and qualitative analysis of a corporation’s equity value and creditworthiness. This is very important because it plays a crucial role in making informed decisions while making adjustments relating to the selection, weighting, and allocation of assets. In addition, experts argue that such kind of information forms the basis for developing corporate social responsibility initiatives.
Advantages of Responsible Investing
Studies have shown that corporations that integrate the concept of responsible investing in their investment decisions reap several benefits with regard to the effectiveness of their corporate social responsibility programs. One of the major advantages of responsible investing is the economic efficiency of an organization. Environmentally conscious and socially cohesive business practices by any corporation often pay off good returns in the long run in terms of achieving economic sustainability.
This observable fact is influenced by the increasing demand for products that are compatible with the social norms and environmental regulations across the world. Experts argue that political regulation has played a major role in ensuring organizations conform to the set guidelines through government measures such as emission limit controls that have encouraged more corporations to consider integrating the concept of responsible investment. It is important to note that economic efficiency in a corporation cannot be achieved without taking the personal values of investors into consideration. For example, the biggest motivation of all investors has a promising future. Thus they are always willing to make the necessary contributions towards achieving an environmentally conscious and socially sustainable investment culture. This forms a good foundation for an informed and inclusive decision-making process because the needs and interests of all stakeholders will be taken into consideration. In turn, this enhances the effectiveness of the corporate social responsibility initiatives because the goodwill from investors is assured since their money will be put into good use.
Another advantage of responsible investment is the fact that it develops investments with competitive returns and limited risks. According to investment experts, the economic relationship between investment and sustainability often leads to positive results within a corporation with regard to the efficiency of the service delivery systems, the effectiveness of the decision-making process, and the satisfaction of investors. For example, investors have a higher chance of approving corporate social responsibility programs proposed by a corporation’s management team provided that the existing investments have proven to be competitive enough and with minimal or no risks involved. One of the greatest fear among investors is putting their money in high-risk investments or in areas that are politically sensitive.
This often creates fear because there is a high chance that they might make huge losses that will take a long time to recover. Therefore, for a corporation to succeed in its corporate social responsibility initiatives, it is necessary to ensure that the support of all investors is earned before decision-making. In addition, the informed input of investors with regard to the corporate social responsibility agendas is very crucial to the competitiveness of investments because the reception that people give to a corporation’s activities within a community depends on the impact it is having on their quality of life.
Disadvantages of Responsible Investment
Investment experts argue that responsible investment has a number of reservations despite the immense value it adds to an organization. According to research, the drawbacks associated with the responsible investment are highly inclined towards the ability and willingness of an organization to commit enough resources into the process of integrating the social, environmental, and governance elements in investment decisions.
One of the main disadvantages of responsible investment is that it requires a lot of time and extensive research. Studies have shown that the amount of time required in studying the potential of an investment is often a put-off to investors who have a wide portfolio because of all the necessary benchmarks. Unlike the traditional forms of investments that are passive in nature, ethical investment requires both qualitative and quantitative research with regard to the potential of investments to be competitive enough without attracting unmanageable risks.
In addition, it is important for an investor to ensure that the proposed investment aligns with the organization’s corporate values. This is an important element in making decisions geared towards implementing the corporate social responsibility agendas. According to experts, the social responsibility agendas of an organization are a reflection of its corporate values, thus the reason why responsible investment requires adequate research into the potential of an investment. For example, an organization that promotes the value of sustainable business practices should extend the same commitment to the decisions of its corporate social responsibility programs.
Another drawback associated with responsible investment is the fact that it is not often an optimal strategy considering the high costs involved. Studies have shown that there is no guarantee that ethical investing will give an organization optimal return even when assured financial gains are sacrificed. This phenomenon is necessitated by the high costs incurred in the additional research required before committing to any investment. Experts argue that the need for an organization to put channel resources into an investment that matches its belief system is quite costly because it often eats into the portfolio’s profits.
This challenge has proven to be a big influencing factor with regard to the decisions that some organizations make for their corporate social responsibility programs. For example, instead of embarking on an ethical investment approach that is costly, an organization can opt to apply the conventional strategies and commit a considerable fraction of its profits to increase the number of activities in its corporate social responsibility agendas. Such a decision is often influenced by the reservations of shareholders regarding the level of risks they are willing to take on investments. Experts argue that conventional strategies of investing have lower risks, but their returns are not as augmented as those associated with responsible investing.