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An Introduction to Socially Responsible Investing (SRI)

Socially responsible investing, though not a major investment theme here in Singapore, has been practiced by many institutions and individuals in foreign shores who believe in ethical investing.

The basic idea behind SRI is the awareness that investors should only invest in corporations that add value to the community as a whole and are not encouraging or practising activities that can be harmful to society.

The basic No-Nos

Most investors who are new to this concept, like me, only see SRI as a restriction on investing in companies that are associated with alcohol, gambling, tobacco, or even weapons. In our local context in Singapore, that might include companies such as Thai Beverage (SGX: Y92) for its beer brewing and alcohol distillation business, Genting Singapore (SGX: G13) for its casino in Resorts World Sentosa, and Singapore Technologies Engineering (SGX: S63) for its supply of military equipment to the Singapore Armed Forces and other armies around the world.

The grey area

For investors who take SRI onto the next level, they might be interested in investing only in companies that practice ethical policies that promote environmental, human rights, transparency and social justice causes.

However, that is where an issue might arise: Where should the cut-off point be? How deep should an investor dive into a company’s supply chain or customer relationships, for example, for proof that the company’s indeed a socially responsible entity?

For instance, SingTel (SGX: Z74) provides a necessary service – telecommunication services – to the public and helps connect people with each other. However, it also provides enterprise communication services to companies that might not be adhering to the principles of SRI (for example, Thai Beverage, Genting Singapore, and ST Engineering might very well be customers of SingTel). Is that still acceptable from an SRI standpoint if we were to invest in SingTel’s shares?

The problems could be even more confusing if it involves controversial issues. The palm oil industry has been accused by the Western media for practicing unsustainable planting methods. However, many in the palm oil industry argue  that the smearing by the Western media is just a propaganda campaign to help promote other types of oil products that are produced by the Western countries, such as soy or corn. The whole issue is highly debatable and it’s unlikely that any black-and-white answer would ever surface. In such cases, what should be the stance adopted by those who practice SRI?

Foolish Summary

I believed that investing should be done for the greater good of the society as a whole. However, I don’t have the answers on how it should be done. For individual investors like you and me, we could perhaps set our own standards when it comes to SRI. And if you are ever thinking of investing in a fund that observes SRI, it is best done after you have read through its prospectus and feel comfortable about any possible misalignments in the ethical standards between the fund and you.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.