Oxstones Investment Club™Socially responsible investing (SRI), also known as sustainable, socially conscious, “green” or ethical investing, is any investment strategy which seeks to consider both financial return and social good.
In general, socially responsible investors encourage corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity. Some avoid businesses involved in alcohol, tobacco, gambling, pornography, weapons, and/or the military. The areas of concern recognized by the SRI industry can be summarized as environment, social justice, and corporate governance—as in environmental social governance (ESG) issues. In addition to stock ownership either directly or through mutual funds, other key aspects of SRI include shareholder advocacy and community investing.
The term “socially responsible investing” sometimes narrowly refers to practices that seek to avoid harm by screening companies included in an investment portfolio. However, the term is also used more broadly to include more proactive practices such as impact investing, shareholder advocacy and community investing. Amy Domini, a prominent member of the socially responsible investing community and the founder of Domini Social Investments, has stated that shareholder advocacy and community investing are pillars of socially responsible investing and that doing only negative screening is “not what I would consider adequate.
Modern applications
Socially responsible investing is a booming market in both the US and Europe. Assets in socially screened portfolios climbed to $3.07 trillion at the start of 2010, a 34% increase since 2005, according to the US SIF’s 2010 Report on Socially Responsible Investing Trends in the United States. From 2007 to 2010 alone, SRI assets increased more than 13%, while professionally managed assets overall increased less than 1%. As of 2010, nearly one of every eight dollars under professional management in the US is involved in socially responsible investing—12.2% of the $25.2 trillion in total assets under management tracked by Thomson Reuters Nelson.
Research estimates by financial consultancy Celent predict that the SRI market in the US will reach $3 trillion by 2011. The European SRI market grew from €1 trillion in 2005 to €1.6 trillion in 2007.
Government-controlled funds
Government-controlled funds such as pension funds are often very large players in the investment field, and are being pressured by the citizenry and by activist groups to adopt investment policies which encourage ethical corporate behavior, respect the rights of workers, consider environmental concerns, and avoid violations of human rights. One outstanding endorsement of such policies is The Government Pension Fund of Norway, which is mandated to avoid “investments which constitute an unacceptable risk that the Fund may contribute to unethical acts or omissions, such as violations of fundamental humanitarian principles, serious violations of human rights, gross corruption or severe environmental damages.”
Many pension funds are currently under pressure to disinvest from the arms company BAE Systems, partially due to a campaign run by the Campaign Against Arms Trade (CAAT).[16] Liverpool City Council has passed a successful resolution to disinvest from the company,but a similar attempt by the Scottish Green Party in Edinburgh City Council was blocked by the Liberal Democrats.
Mutual funds and ETFs
Socially responsible mutual funds counted by the 2010 Trends Report increased in number to 250 in 2010, up from 173 in 2005 & 2007, 189 in 2003, and 167 in 2001. The overall number of mutual funds incorporating ESG has increased 45% since 2007. Additionally, 26 exchange-traded funds (ETFs) that incorporate ESG criteria were identified with $4 billion in assets at the end of 2009, a 76% increase from the eight ETFs with $2.25 billion in net assets identified at the end of 2007 . US SIF maintains charts describing the socially responsible mutual funds offered by its member firms.
Separately managed accounts
According to the 2010 Report on Socially Responsible Investing Trends in the United States, among separate account managers, 232 distinctive separate account vehicles or strategies, with $122.4 billion in assets, incorporated ESG factors into investment analysis.
Shareholder advocacy
Shareholder resolutions are filed by a wide variety of institutional investors, including public pension funds, faith-based investors, socially responsible mutual funds, and labor unions. In 2004, faith-based organizations filed 129 resolutions, while socially responsible funds filed 56 resolutions.
Regulations governing shareholder resolutions vary from country to country. In the United States, they are determined by the Securities and Exchange Commission, which also requires mutual funds to disclose how they voted on behalf of their investors. U.S. shareholders have organized various groups to facilitate jointly filing resolutions. These include the Council of Institutional Investors, the Interfaith Center on Corporate Responsibility, and the US SIF.
From 2008 through 2010, more than 200 US institutions and investment management firms filed or co-filed proposals. These institutions and money managers collectively controlled $1.5 trillion in assets at the end of 2009. The top categories of environmental and social issues from 2007 to 2010 were political contributions and climate change and environmental issues.
Community investing
Community investing, a subset of socially responsible investing, allows for investment directly into community based organizations. Community investing institutions use investor capital to finance or guarantee loans to individuals and organizations that have historically been denied access to capital by traditional financial institutions. These loans are used for housing, small business creation, and education or personal development in the US, or are made available to local financial institutions abroad to finance international community development. The community investing institution typically provides training and other types of support and expertise to ensure the success of the loan and its returns for investors.
Community investing grew more than 60% from 2007 to 2010. Assets held and invested locally by community development financial institutions (CDFIs) based in the US totaled $41.7 billion at the start of 2010, up from $25 billion in 2007.
Investing strategies
Investing in capital markets
Social investors use several strategies to maximize financial return and attempt to maximize social good. These strategies may satisfy the ethical principal of non-harming, but with the exception of shareholder activism/engagement, they do not necessarily create positive social impact.
Negative screening
Negative screening excludes certain securities from investment consideration based on social and/or environmental criteria. For example, many socially responsible investors screen out tobacco company investments.
The longest-running SRI index, the Domini 400—now the MSCI KLD 400—was started in May 1990. It has continued to perform competitively —with average annualized total returns of 9.51% through December 2009 compared with 8.66% for the S&P 500.
Despite this impressive growth, it has long been commonly perceived that SRI brings smaller returns than unrestricted investing. So-called “sin stocks”, including purveyors of tobacco, alcohol, gambling and defense contractors, were banned from portfolios on moral or ethical grounds. And shutting out entire industries hurts performance, the critics said. However, in a comprehensive study, financial economists Lobe, Roithmeier, and Walkshäusl taking the position of the advocatus diaboli, answer the question whether to invest in a socially responsible way – or not? They create a set of global and domestic sin indexes consisting of 755 publicly traded socially irresponsible stocks around the world belonging to the Sextet of Sin: adult entertainment, alcohol, gambling, nuclear power, tobacco, and weapons. They compare their stock market performance directly with a set of virtue comparables consisting of the most important international socially responsible investment indexes. They find no compelling evidence that ethical and unethical screens lead to a significant difference in their financial performance, which is in contrast with the results of prior studies on sinful investing.[28]
Divestment
Divesting is the act of removing stocks from a portfolio based on mainly ethical, non-financial objections to certain business activities of a corporation. Recently, CalSTRS (California State Teachers’ Retirement System) announced the removal of more than $237 million in tobacco holdings from its investment portfolio after 6 months of financial analysis and deliberations, although the efficacy of this action has been questioned.
Shareholder activism
Shareholder activism efforts attempt to positively influence corporate behavior. These efforts include initiating conversations with corporate management on issues of concern, and submitting and voting proxy resolutions. These activities are undertaken with the belief that social investors, working cooperatively, can steer management on a course that will improve financial performance over time and enhance the well being of the stockholders, customers, employees, vendors, and communities. Recent movements have also been reported of “investor relations activism”, in which investor relations firms assist groups of shareholder activists in an organized push for change within a corporation; this is done typically by leveraging their enhanced knowledge of the corporation, its management (often via direct relationships), and the securities laws as a whole.
Shareholder engagement
A less vocal subtype of shareholder activism, shareholder engagement requires extensive monitoring of the non-financial performance of all portfolio companies. In shareholder engagement dialogues, investees receive constructive feedback on how to improve ESG issues within their sphere of influence.
Positive investing
Positive investing is the new generation of socially responsible investing. It involves making investments in activities and companies believed to have a positive social impact. Positive investing suggested a broad revamping of the industry’s methodology for driving change through investments. This investment approach allows investors to positively express their values on corporate behavior issues such as social justice and the environment through stock selection — without sacrificing portfolio diversification or long-term performance.[34] Positive screening pushes the idea of sustainability, not just in the narrow environmental or humanitarian sense, but also in the sense of a company’s long-term potential to compete and succeed.
Community investment
By investing directly in an institution, rather than purchasing stock, an investor is able to create a greater social impact: Money spent purchasing stock accrues to the stock’s previous owner and may not generate social good, while money invested in a community institution is put to work. For example, money invested in a Community Development Financial Institution may be used by that institution to alleviate poverty or inequality, spread access to capital to under-served communities, support economic development or green business, or create other social good. In 1984, Trillium Asset Management’s founder, Joan Bavaria, invited Chuck Matthei| of the Institute for Community Economics (ICE), an organization that helps communities create and sustain land trusts, to a meeting of US SIF (formerly the Social Investment Forum). It is likely that this was the first time a nonprofit organization with a loan fund would meet directly with SRI managers. Trillium clients began investing in ICE later that year.
Impact investing
In Impact investing, an investor will actively seek to place capital in businesses and funds that combine financial and social returns. These businesses can thus provide social or environmental impact at a scale that purely philanthropic interventions usually cannot reach.[35] This capital may be in a range of forms including equity, debt, working capital lines of credit, and loan guarantees. Examples in recent decades include many investments in microfinance, community development finance, and clean technology. Impacting investing has its roots in the venture capital community, and an investor will often take active role mentoring or leading the growth of the company or start-up. Impact investing has become prominent in international development, where funds and organizations such as the Acumen Fund, Rockefeller Foundation, the Grassroots Business Fund, the Skoll Foundation and Verde Ventures are using this approach.
Global context
Socially responsible investing is a global phenomenon. With the international scope of business itself, social investors frequently invest in companies with international operations. As international investment products and opportunities have expanded, so have international SRI products. The ranks of social investors are growing throughout developed and developing countries. Trade organizations keeping track of some of this growth include the US SIF: The Forum for Sustainable and Responsible Investment in the U.S.,[36] the Social Investment Organization in Canada,[37] EuroSIF in the E.U.,[38] the Associate for Sustainable and Responsible Investment in Asia, and the Responsible Investment Association of Australasia. In 2006, the United Nations Environment Programme launched its Principles for Responsible Investment. The Principles provide a framework to help investors incorporate environmental, social, and governance (ESG) factors into the investment process.
Ethical investment in the UK
In 1985, Friends Provident launched the first ethically screened investment fund with criteria which excluded tobacco, arms, alcohol and oppressive regimes. Since 1985, over 90 investment funds have launched offering a wide range of investment criteria; both negatively screened and with positive investment criteria i.e. investing into companies involved in promoting sustainability.
Barchester Green Investment Barchester Green Investment launched in 1985 and is the UK’s longest established ethical investment specialist IFA (Independent Financial Adviser) firm. Barchester is still one of the largest of the UKs advisory firms specialising in this market with £110 million in assets under advice and several thousand clients in the UK and Europe.
The Ethical Investment Association (EIA) provides a searchable database of http://ethicalinvestment.org.uk/ advisers specialising in responsible investment products and funds.
Since 1985, most of the major investment organizations have launched ethical and socially responsible funds, although this has led to a great deal of discussion and debate over the use of the term “ethical” investment. This is because each of the fund management organizations tend to apply a slightly different approach to running their funds. The large Dutch insurance group AEGON, for example, run very tightly screened ethical funds, whereas the Standard Life and AXA “ethical” funds operate with less strict exclusion criteria.
In recent years there has been growth in the market for high social impact investments, this is a new style of investing where the businesses receiving investment have social or environmental goals as a primary purpose.
Worldwise Investor launched in 2011 and has 132 socially responsible and ethical investment funds listed in the fund library showing up to the minute performance data.
According to the Ethical Investment Research Service (EIRIS), as of June 2011, GBP 11.3 billion were invested in ethical and environmental investment funds in the UK.
Ethical investment in higher education
In 2007, the Dwight Hall organization at Yale University launched the first undergraduate-run socially responsible investment fund in the United States. The Dwight Hall Socially Responsible Investment Fund was initially seeded with $50,000 of the Dwight Hall organization’s endowment and is managed by a committee of ten undergraduate Yale College students. The DHSRI fund makes use of traditional methods of socially responsible investing to have a positive environmental and social impact while aiming to outperform standard investment benchmarks and maximize financial return.
The first student managed (undergraduate or graduate) investment fund to employ socially responsible investing was the Arnone-Lerer fund at Villanova University in January 2004 which made its first investments in March 2004. (http://www.students.villanova.edu/smf/fund_performance.htm) The fund has been managed according to the Catholic Bishops’ Statement on Socially Responsible Investment. The SMF program at Villanova currently includes 170 students managing five different investment funds and offers four academic courses (12 credits) per year.
From Wikipedia, the free encyclopedia- http://en.wikipedia.org/wiki/Socially_responsible_investing
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