Increasingly, investors are consciously casting a ballot with every investment decision they make. When a company is perceived as exploiting workers in unsafe foreign factories, for example, informed consumers often stop buying that company's product, and informed investors and investment managers sell the stock to reduce portfolio risk. Some, with longer-term investment strategies, begin pushing management to change practices.
The modern roots of responsible investing can be traced to the impassioned political climate of the 1960s with the Vietnam War, civil rights, and women's equality. In the 1970s, this broadened to include labor/management issues and antinuclear convictions.
During the 1980s, billions of dollars were refocused on pressuring the white minority government of South Africa to dismantle apartheid. Then came the Bhopal, Chernobyl, and Exxon Valdez incidents, and the climate crisis, which heightened environmental issues for socially conscious investors.
Three dynamic strategies
All investors look for profit potential. Responsible investors also integrate an evaluation of environment, social, and governance (ESG) factors into the investment process. Here are three strategies:
•ESG integration: Managing ESG issues can have a material influence on a company's forward-looking risk profile, profitability, and share price. ESG analysis offers valuable insights into corporate policies, practices, culture, and impacts.
•Shareowner engagement: Efforts include dialoguing with companies and filing proxy resolutions to encourage more-responsible corporate citizenship and a more positive effect on society at large.
•Community impact: Investment strategies direct capital to low-income, at-risk communities and include investments in social enterprises – for-profit private companies with business models focused on correcting social problems.
$3.7 trillion in the US
The US SIF 2012 Report on Sustainable and Responsible Investing Trends in the United States identified $3.7 trillion in professionally managed portfolios using one or more of the three dynamic strategies described above.
Since the first trends report in 1995, responsibly managed assets have grown from $639 billion to more than $3.7 trillion, an increase of 486 percent, versus a 326 percent increase in the broad universe of assets under professional management.
What is fueling the growth?
•Information. More and better information is available to investors. The better informed investors are, the more responsible their actions tend to be.
•Performance. An impressive body of academic evidence and real-world results dispels the myth that ESG integration results in underperformance.
•Availability. Responsible investment options are increasingly available through specialized investment advisers, mutual funds, exchange-traded funds, and impact investing funds.
•Sustainability. The growth of sustainable, responsible, impact investing coincides with increasing public interest in green options.
•Climate change. As investors become increasingly aware of both the dangers and business opportunities embodied in the climate crisis, more seek to invest in solutions.
•Corporate scandals. Accounting fraud and other scandals have eroded trust in corporate leadership. Many investors are attracted to an investment process that delves deeper into corporate behavior and its effect.
Investing for a better world
Directing the flow of investment capital into enterprises that are in business to both make money and have a positive, healthy effect is catalyzing a shift toward a truly sustainable future.
– Steven J. Schueth is cofounder of The SRI Conference and president of First Affirmative Financial Network LLC., an independent registered investment adviser for socially conscious individual and mission-driven institutional investors.