What is socially responsible investing?
Socially responsible investing (SRI) is a growing trend and is predicted to become a $50 trillion market over the next two decades. Socially responsible investing, which is sometimes referred to as impact investing, is the practice of selecting investments that can not only provide attractive returns, but also meet specific criteria in terms of environmental, social, and governance (“ESG”) concerns.
Environmental criteria include the company’s policies that directly or indirectly affect the environment, most commonly concerning climate change, but also clean water and various other environmental causes. Social considerations take into account how a company manages relationships with employees, suppliers, customers, and its communities. Governance refers to a company’s leadership, executive pay, internal controls, and shareholder rights.
As an example, prescription eyeglass company, Warby Parker, would be considered an SRI investment since it donates glasses to underserved communities via its buy one, give one program. An example of an entire industry that could be considered SRI would be the solar industry.
If you are looking to invest in this sector, be sure that each company, fund, or investment has a strong track record regarding their ESG standards. You can generally locate this information in an Impact Report published on a company’s website or by verifying certain industry-standard credentials, as in the case of a business that is a Certified B Corp.
Questions to Consider When Identifying ESG Investments.
- Does the company use renewable energy?
- How does the company dispose of waste and reduce pollution? It might need to pass strict audits to ensure that it’s properly removing any waste. These tests also ensure that the companies are up to date with sustainable building practices, which as we will discuss later, is very important for socially responsible real estate projects.
- Are there any steps taken by the company to reduce its carbon footprint or policies enacted to help mitigate climate change?
- Does the company have any established criteria for resource conservation or the treatment of animals?
- Is there a healthy work culture? Employee satisfaction leads to higher morale, less employee turnover, and increased revenue.
- Does the company encourage its employees to perform volunteer work or donate a percentage of its profits to the local community?
- Does it work with suppliers that hold the same values?
- Does the company offer personal development opportunities to its employees?
- Does the company use accurate and transparent accounting methods?
- How does the company avoid conflicts of interest? Are there any potentially improper relationships with government officials?
- Are there any current or past allegations or history of criminal activity such as money laundering or other financial corruption?
- How does the company manage its payroll, internal controls, audits, and shareholder rights? Streamlining these processes will help companies responsibly manage their finances, reduce operating expenses, and maintain high governance scores.
How Does Socially Responsible Investing Apply in Real Estate?
As with any type of investment, ESG criteria can also be applied to real estate investing. Consider how a potential investment might impact the community it serves on a local and global scale, both short- and long-term, using the criteria below.
Many properties are LEED-certified, which states that the properties have gone through rigorous tests to be environmentally friendly. An environmentally conscious real estate project would use environmentally friendly materials, or reuse/restore buildings using recycled materials. Reducing a project’s carbon footprint can also save on energy usage by implementing water and energy-efficient systems. Examples of these systems could be window treatments with proper insulation, energy-efficient HVAC systems, or systems that run on geothermal or solar energy.
Accessibility, safety, and community impact are reflected in a socially responsible real estate project. Look for how the local and global communities are supported by the project. Does the development complement and support local businesses (entrepreneurs, creatives, vendors) or does it displace the existing community?
Additionally, certain real estate development projects may be more “socially” active than others. This could mean the hosting of fundraisers and community events that encourage, promote, and support local causes. The project should also receive feedback from local residents or tenants on issues related to them like tenant mix, building maintenance, operations, security, and more.
To measure governance in a real estate project, the managers need to be able to properly control their cash flow during the duration of the development and provide transparent and accurate accounting.
What Is Place-Based Investing?
Place-based investing aims to use the framework of socially responsible real estate, but more specifically with a geographic lens. Typically, this translates to investing in projects and companies that address the needs of marginalized communities with hyper-local projects. One of the most attractive traits of place-based investing is that it occurs in communities that matter to the investor.
Place-based investing can be made available to a project’s local community by leveraging technology and applying the concepts of crowdfunding. This makes it easier to bring in a large number of investors who are also advocates of both the project and the general community in which it exists.
Equity crowdfunding or crowdlending for businesses, startups, and real estate can be place-based. Place-based crowdfunded projects can experience a larger impact on their community because of the publicity and marketing benefits that crowdfunding brings to a project. Further, by allowing underrepresented investor groups access and participate in new investment opportunities, a project’s impact can also be found in its accessibility.
Many investors today are considering impact, and not just financial gain, when investing. This has caused the SRI sector to expand, especially among younger generations like Millennials. Approximately 63% of Millenials want their dollars to make an impact, saying that businesses should be focused on improving society. This demographic is very tech-savvy, accelerating the trend of using online platforms to invest in SRI.
Including these investments in your portfolio could result in high returns and even higher satisfaction, knowing that your dollars are making a real impact in communities.
You can start exploring place-based investments on the NextSeed platform, including community-driven business as well as impact-oriented commercial real estate projects.
Looking to start socially responsible investing? Create a NextSeed account here to see our current SRI selection today!
About the Author
Dave Seeburger launched and grew a multi-award winning residential real estate development company. Started his career in oil and gas, analyzing and structuring global projects. Recently served as Executive Director of Business Battle, a nonprofit highlighting veteran-owned businesses. Earned a BS from Missouri University of Science and Technology and an MBA from Rice University.