Socially Responsible versus Environmental, Social, and Governance Investment
As sustainable investors, we can make a difference in the future of the planet through the financial decisions we make. The Forum for Sustainable and Responsible Investment’s Report on Sustainable and Responsible Investing Trends in the United States identified $8.72 trillion in total assets under management at the end of 2015 using one or more sustainable, responsible, and impact investment strategies. Yes, when we invest, we want a strong financial performance as well as to make contributions that advance environmental, social, and governance (ESG) practices. In fact, while ESG practices may seem identical to socially responsible investments (SRI), they’re actually quite different. You may always have thought that SRIs were the way to go, but a little more scrutiny might point you to ESG investments as the ones which can use your dollar to make the most impact on our planet. You decide…
Socially responsible investments are exclusionary
SRIs exclude certain companies or even entire industries because their products or services are not consistent with a green philosophy. These are markets that not only refuse to acknowledge that the environment is the most urgent political problem of our age; they contribute to international capitalism, consumerism, and the exploitation of natural resources. SRIs, instead, focus on investments that bring into balance the conservation and preservation of the Earth’s natural resources, habitats, and biodiversity with human culture and communities. SRIs may trace their origins to 1758, when the Quakers in the U.S. prohibited members from participating in the business of buying or selling humans.
There is considerable recent interest and growth in the concept of impact investing, with focus on private market investments with a social return. Indeed, the emergence of impact investing has brought new interest and investors to the SRI field. The creation of SRI indices speaks to the growing relevance of SRI on the investment marketplace. Many publicly traded companies, in turn, aim to be selected for SRI funds and promote their inclusion in SRI indexes to their stakeholders.
SRI is slowly becoming an investment option that is gaining momentum within the financial community. SRI mutual funds continue to rise, with a four-fold increase in the last ten years with respect to the number of funds and the funds’ assets. Socially responsible investing appears to be spreading throughout the world, with Canada, Europe, Australia, and Japan leading the way.
For those individuals interested in mutual funds, here are the top 10 performing SRI mutual funds as of September 2015, based on their three year average annual return.
- Parnassus Endeavor Fund
- Calvert Responsible Index Fund
- Vanguard FTSE Social Index Fund
- Calvert Equity Portfolio
- Parnassus Core Equity Fund
- Parnassus Mid Cap Fund
- GuideStone Funds Growth Equity
- GuideStone Funds Equity Index
- Calvert U.S. Responsible Index Fund
- Parnassus Core Equity Fund
Sustainable crowdfunding is another SRI direction which many investors feel comfortable taking, as they’re assured of creative, environmentally positive business models that are part of eco-conscious and mission-driven companies. Regardless of the fund, SRI requires both financial return and social good. Social investors will often favor environmentally responsible corporate practices, workforce diversity, and product safety and quality.
Environmental, social, and governance investment practices
By incorporating ESG criteria into investment analysis and portfolio construction, investors can identify more responsible companies for potential investment and improve the sustainability performance of their current investments. Owning shares in a company gives investors a channel through which to raise environmental, social, and corporate governance issues of concern. Active shareholders can bring important issues to the attention of company management, often winning media attention, educating the public, and influencing positive changes in the way business is conducted.
From 2014 through the first half of 2016, more than 200 institutional investors and money managers collectively controlling a total of at least $2.56 trillion in assets filed or co-filed shareholder resolutions on ESG issues. Investors advocated for more than 700 resolutions relating to environmental, social, and key governance issues for the 2016 proxy season. Social and environmental resolutions have addressed climate change, equal employment opportunity, human rights, and sustainability reporting. In addition, investors also filed resolutions questioning companies on their governance structures and practices, particularly those involving board elections, executive pay, and responsiveness to shareholders. In recent years, these proposals have been gaining traction and frequently receive majority support.
Shaping sustainable policies and practices at privately held companies as part of an ESG investment strategy takes time. You must read those thick stockholders’ packets filled with tiny print. You have to be ready to join others to advocate on sustainability issues such as the labor conditions in global supply chains or environmental and community relations practices. Yet, the effort can be worth it, as ESG issue investors, often combining support with non-profit organizations, have already persuaded some publicly held companies to:
- improve climate risk disclosure
- set greenhouse gas emission reduction goals
- adopt goals to reduce energy use or to use renewable energy
- implement sustainable forestry practices
- address poor labor and human rights conditions in their global supply chains
- pledge not to discriminate against employees on the basis of their sexual orientation
- disclose health, safety, and environmental risks associated with hydraulic fracturing
- promote gender diversity on their boards of directors
- issue detailed reports on sustainability
- report on political and lobbying expenditures and establish policies to oversee or limit such spending
- provide investors who meet specified ownership criteria with access to their proxy materials in order to nominate alternative directors to the board.
SRI or ESG investment practices?
There are several motivations for sustainable, responsible, and impact investing, including personal values and goals and philosophical connections to institutional mission. Investments such as community development loan funds or clean tech portfolios that are likely to provide important societal or environmental benefits, which fall into the category SRI, are consistent with investors who adhere to strong environmental values. Other who are more insistent on accruing financial outperformance over the long term may opt for companies in which they can voice demands for ESG practices, as a growing body of academic research shows a strong link between ESG and financial performance.
Shout out to US SIF for its efficient defining of terms.