Socially Responsible Investing
Andrea Larson
Refers to activities that direct capital to companies that take action to promote equity, sup port a healthy environment, and build communities. SRI is typically focused on corporations with ‘‘sustainable’’ practices and strategies that maximize economic, social, and environmental performance while sustaining, and preferably renewing, communities and eco systems. SRI investors avoid companies that manufacture products or employ practices they believe are harmful to society. Typically, investments flow to companies with a proactive environmental record, positive employee relations, and strong community involvement. The aim is to promote good business across economic, environmental, and social performance indicators – and to get high returns while so doing.
SRI has been practiced for hundreds of years. Beginning as early as the seventeenth century, Quakers refused to invest in and profit from companies associated with the slave trade or war related activities. This was the start of what is today called negative screening. By the early twentieth century religious groups refused to invest in companies involved in the production of alcohol or tobacco products. In the 1980s avoidance investing resulted from the public outcry associated with companies investing and profiting from South Africa. The anti apartheid campaign in South Africa was the first wide spread recognition of the power of social investing.
From the 1960s onwards there were a number of events that bolstered the SRI movement in the United States. Vietnam War protests, civil rights battles, and the assassination of Dr. King were followed by federal legislation, including the National Environmental Policy Act, the Consumer Bill of Rights, the Food and Drug legislation spurred on by the thalidomide case, and the Highway Safety Act. The results offered proof that people could bring about significant changes by demanding that corporations take greater responsibility commensurate with their influence in society. In the 1980s and early 1990s SRI portfolio management firms such as Franklin Research and Development and US Trust of Boston were born. Social investment funds like Calvert and Working Assets were created and a number of associations, like the Social Investment Forum, were founded. The creation of these institutions marked the beginning of positive screening. Investors understood that corporations had the capacity to impact society and the environment in both positive and negative ways through their business practices. SRI investors began to analyze the practices of corporations and take positive practices into account when making investment decisions.
Three SRI strategies have evolved over time: screening, shareholder advocacy, and community investment. Positive and negative screens were used: positive to reinforce desired behavior as it improved (e.g., sound labor practices or responsible environmental actions) and negative to exclude firms from lists (e.g., tobacco and alcohol distribution or sale, animal testing). Shareholder advocacy engaged stockholders with companies to change firm practices through negotiation, formal resolutions (petitions to corporate boards), and block voting at annual meetings. Investments by firms in neighborhoods through corporate support of community banks, credit unions, loan funds, or microenterprise lending constituted community investments. Results were measured in terms of jobs, afford able housing, and other vital signs of community renewal.
Between 1993 and 2003 there was a rapid rise in funds invested in socially responsible portfolios. The growth and success of SRI in the United States since the mid 1990s signaled a fundamental shift in the business environment, characterized by a public desire to see and support a convergence of business issues and larger social concerns. SRI reflected investors’ growing desire to screen out investments in firms perceived to have adverse effects on society and to favor those companies whose actions appear to enhance public health, environmental well being, and improved quality of life.
The fundamental principle behind SRI is the alignment of financial goals and social/environ mental responsibility. Investors are not asked to give up returns in order to invest responsibly. In fact, investors demand that socially responsible funds perform as well as – if not better than – non screened funds. To the surprise of many, the performance of socially responsible funds exceeded the performance of the overall stock market between 1997 and 2003. The investment bank and brokerage firm Smith Barney stated in 2001:
Socially responsible investing has moved into the mainstream of the United States as a result of demographic and business trends that are present in our economy today. There are two current trends, which imply that socially responsible investing is not simply a fad, or short investing strategy. On the business side, there is evidence of convergence between social and business interests. Socially aware investors are looking closely at the practices of businesses specific to environment, labor policies, and overall ethical track record. Businesses are not only recognizing the trend in socially aware investing but they are also recognizing that investments in sustainable practices yield long-term financial results. (www.smithbarney.com)
Growth in socially responsible investing
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1984
$40 billion
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1995
$639 billion
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1997
$1.18 trillion
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1999
$2.16 trillion
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2001
$2.32 trillion
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Source: 2001 report on socially responsible investing trends in the United States, Socially Responsible Investing Forum, http://www.socialinvest.org/areas/research/trends/2001-Trends/htm (March 2003 updated version)
The pool of invested capital in the SRI category grew substantially in a short period of time.
By 2003 approximately $1 out of every $9 under professional management in the United States was invested using SRI screens. Of the nearly 12 percent of all investment assets under professional management in the United States, $2.32 trillion out of $19.9 trillion resided in a professionally managed portfolio utilizing one or more screening strategies.
Trends in SRI are a signal of changing investor preferences and values that reflect the shifting social and political conditions in which businesses now operate globally. Together with engaging customer demands, new scientific data, legislative and regulatory requirements, and more active non governmental criticism of business practices, SRI can be seen as an important indicator of emerging definitions of ‘‘good business’’ in the twenty first century. Today, companies ignore these indicators and trends at their peril. Firms that can find opportunity for innovation and competitive differentiation will benefit.
Financial markets have become more attuned to responsible behavior and its implications for future economic performance. SRI indexes (e.g., Domini, Citizens Index) have outperformed the general market indexes. This success in financial markets is based upon the market’s ability to uncover value, assess risk, and judge expected future performance. The market expects these companies to outperform the general market, due to their leadership in adopting low risk and sustainable practices and innovations. The belief is that, over the long run, all companies will implement.
All corporations fall on a spectrum between being simply reactive and integrating sustainable business methodology as a core value. The cur rent convergence of business issues and social issues, as recognized by the financial markets, is forcing companies to examine their practices and policies. As the factors driving this convergence gather momentum and strength, companies may no longer have the option to change. Regulatory demands, consumer preferences, financial markets, and international requirements may demand that companies change. Current data support the conclusion that SRI does not have to come with financial sacrifices and that, in some instances, it may even outperform unscreened portfolios. Consequently, those that perceive the inefficiencies and take advantage of the slow to react corporations will create and capture significant value. The key to this new business model is the creation of economic value in collaboration with the creation of social value.