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The Rise and Rise of Socially Responsible Investment

In June 2012, CEOs of companies from around the world met in Rio de Janeiro to develop voluntary commitments to “sustainability”. Over 150 projects resulted, in areas including energy efficiency, safe drinking water, waste reduction, reforestation, and carbon emissions.

Image Credit: CGIARThese commitments reflect a growing belief among business leaders that sustainable practices are not only good for the environment but can also have a measurable impact on a company's bottom line.

Furthermore, a 2010 report by the United Nations Global Compact found that 93% of CEOs believed that sustainability would be important to their future business success.

Although still  a nascent area, it is clear that sustainable, social investment holds potential for the right kind of investor.

Sustainable and Responsible Investing

Investors are helping to drive the sustainability movement through an increased interest in companies that reflect their personal values. Both in terms of products/services and business practices, the common trait of these investment opportunities is their commitment to a greater social good. About one out of nine professionally managed investment dollars in the United States is currently invested according to sustainable and responsible investing criteria.

Socially responsible investments (SRIs) represent 21.8% of global investment dollars and typically utilize one or more of the following approaches:

Investment Screening

This method incorporates environmental, social, and corporate governance (ESG) factors to analyze and construct investment portfolios. Investors might screen out or include companies in a portfolio based on ESG issues such as employee relations, environmental practices, product safety and utility, and respect for human rights.

For example, many SRIs currently exclude investments in the Sudan and Iran. An SRI might include companies that produce “green energy” products and might screen out companies that produce tobacco or alcohol.

Shareholder Advocacy

Using voting power and other influence to encourage corporate management to follow practices that might improve the company’s ESG efforts and impact, shareholder advocacy has increased in recent years. This has been driven not just by increasing interest but also by greater access to shareholder information and regulatory changes that require increased transparency.

Community Investing

The least common approach, community investing channels investment dollars to benefit individuals or organizations that have been underserved by mainstream financial institutions. What it lacks in terms of total funding it makes up for, to some extent, with rapid adoption growth recently.

Consider the Risks

Some studies indicate that, in general, SRIs perform similarly to non-SRI investments.7 Of course, like all investments, SRIs entail risk and could lose money, and they may underperform similar investments not constrained by social policies.

Specific SRIs may also entail additional risk related to market readiness. Companies that develop environmentally friendly products and services might offer long-term growth potential but could be years away from establishing those products and services in a competitive market.

Focusing on SRIs may limit the total universe of available investments and make it more challenging to establish and maintain your desired asset allocation and diversification. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee against investment loss.

SRIs might have a place in your portfolio if they meet your overall investment objectives. However, there is no guarantee that an SRI will achieve its investment objectives, and different companies may use different definitions of socially responsible investing.

As with all investments, you should take the time to learn about a potential SRI before making a commitment to purchase.

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