Sustainable, responsible, and impact investing (SRI), which is a discipline that avoids or favors certain investments for moral or ethical reasons, has become big business, with an increasingly wide range of options for investors. SRI consists of three main parts: screened investing, shareholder advocacy, and community investing.
In the 1970’s, a new era was emerging as businesses were engaged by investors who championed a concern for ethics and corporate responsibility along with shareholder value. One of the earliest examples was the anti-apartheid campaigns, which can find their root in 1971 when the Episcopal Church filed the first shareholder resolution by a religious organization, calling on General Motors to withdraw its business in South Africa.
In more recent history, community – or sector – investing increased 47 percent from 2010 through 2012 during a period when a “Move Your Money” campaign encouraged investors to shift their depository accounts from “too big to fail” banks to smaller, local community-based financial institutions.
Just as there is no single approach to SRI, there is no single term to describe it. Investors use labels such as “community investing,” “green investing,” “impact investing,” “socially responsible investing,” “sustainable investing,” and “values-based investing,” among others. SRI investors comprise individuals as well as institutions such as universities, foundations, pension funds, nonprofit organizations and religious institutions.
The area that individual investors most often think of when referring to SRI is a strategy referred to as ESG incorporation, which is the consideration of environmental, societal, and corporate governance criteria in investment analysis and portfolio construction across a range of asset classes. Mutual funds are one of the most dynamic segments within the ESG investing space. During the period from 2010 through 2012, the number of ESG mutual funds in the United States grew from 333 to 456, and their collective assets increased from $641 billion to $1.93 trillion, an over 200 percent increase.
Many of the best-known SRI funds come from fund companies that specialize in ESG investing and make it a central part of their mission. Not only do these fund managers use social screens, they typically also use shareholder activism and invest in non-profits and other non-public companies that promote positive values.
In addition to the fund companies devoted exclusively to SRI, several others offer socially responsible funds as part of a broadly diversified fund lineup. These range from actively managed, to index tracking, to quantitative models. A further group might be called “SRI Lite”, which have only a few restrictions based on social screens, such as not holding alcohol, tobacco, nuclear power, or handgun stocks. The largest group of specialty SRI funds (focusing on only one or two issues) are known as “green” funds, which place priority on environmental issues.
Over the years, APC has reviewed SRI funds at client’s requests, and we continue to explore SRI funds within our client portfolios on an individual basis. While there is no solid evidence that SRI funds as a group have financial performance any better or worse than other funds over the long term, performance can certainly differ in the short term. At the end of the day, it’s important to choose an SRI strategy because you are passionate about the principles behind it.
Sources: www.ussif.org, www.socialfunds.com, www.greenmoneyjournal.com, www.morningstar.com
