Socially Responsible Investing

Some four decades ago, the foundations of sustainable investing were established with the advent of modern socially responsible investing, or SRI, which broke new ground by marrying social and environmental considerations with traditional financial considerations. SRI has since grown by encompassing three elements—shareowner activism, screening, and community investing—all of which now inform sustainable investing.

Modern shareowner activism—where stockholders engage with companies on environmental, social, and governance issues through direct dialogue, campaigns, and nonbinding shareowner resolutions that appear on the corporate proxy and go to vote at annual meetings—dates back to the late 1960s. Since then, shareowner activism has evolved into a widespread practice, as described in the next section.5

The 1971 launch of the Pax World Balanced Fund introduced the second SRI pillar—screening out companies in so-called sin sectors, such as weapons, tobacco, alcohol, and so on. Since the late 1990s, some strands of SRI have been building on this ethical, values-based foundation by adding financial value-seeking approaches typified by so-called positive screens that give priority to companies with best practices in corporate social responsibility. Similarly, "best-in-class" screens reward the best social and environmental performers across all sectors—even those typically avoided by SRI, such as oil. According to this strategy, it is best to encourage better sus-tainability practices in all companies. More recently, value-enhancing SRI has emerged, arguing that strong environmental, social, and governance management acts as a proxy for strong business management.6

In 1973, Chicago-based ShoreBank pioneered community investing, which accepts below-market financial returns in exchange for social returns by supporting community development projects such as low-income housing, minority- and women-owned businesses, and microfinance. However, it wasn't until some two decades later that SRI mutual funds began supporting community investing, when the Calvert Social Investment Fund integrated the practice into its portfolio in 1990.7

SRI has moved from a niche practice to the mainstream, with about $1 of every $10 invested in the United States using at least one of the three pillars of social investing, according to the Social Investment Forum. In 2005, $2.29 trillion (9.4 percent) of the $24.4 trillion in total assets under management tracked in Nelson Information's Directory of Investment Managers was involved in SRI—up from $2.16 trillion in 2003.8

Investing for Sustainability

Although SRI growth has been rapid over the past decade, national monitoring bodies measure different attributes of this investment, making growth rates difficult to compare. Still, in Australia SRI funds under management grew 36-fold between 2000 and 2006. In the United States, they grew more than threefold between 1995 and 2005. Canadian SRI increased nearly eightfold between 2004 and 2006. And in Europe, these funds went up by some 36 percent between 2003 and 2006.9

Globally, SRI assets stand at about $4 trillion (see Table 13-2), with U.S. growth plateauing somewhat while funds continue to grow more robustly elsewhere around the world. To place this in context, however, the global management consulting firm McKin-sey & Company estimates global capital markets at $136 trillion and projects this will reach $228 trillion by 2010. So formal SRI represents a mere 3 percent or so of global capital markets.10

Now SRI is shifting terminology, with some leaders in the field advocating for a semantic— and arguably a structural—change, to "sustainable investing." The move seeks to simultaneously broaden and narrow the scope of the practice using this term. It encompasses

Table 13-2. Socially Responsible Investments, by Region, Mid-2000s

Country or Region

Socially Responsible Investments

Year of Data

(billion dollars)

United States

2,290.0

2005

Europe

1,224.0

2005

Canada

439.0

2006

Australia and

New Zealand

7.0

2005

Japan

2.6

2007

Source: See endnote 10.

Source: See endnote 10.

SRI or mainstream investments seeking social and environmental sustainability, but it excludes values-based investment strategies that simply involve ethical considerations (such as Catholic screens of companies that produce drugs that induce abortion) that traditionally fall under the SRI umbrella but that do not promote progress toward sustainability.

Spearheading this movement is Pax World CEO Joe Keefe, who believes that sustainable investing has the potential to be a transformative strategy that revolutionizes investing itself—"at a time when market capitalism must of necessity undergo a sus-tainability revolution equal in significance to the industrial revolution that ushered in the modern period."11

Keefe believes sustainability advances a new conception of wealth, with the potential to offer a solution to the crisis in capitalism by aligning financial outcomes with environmental, social, and governance outcomes— "not with 'values,' mind you, but with outcomes," he notes. Achieving sustainabil-ity requires companies and markets to shift their behavior and necessitates that wealth-creation strategies live up to the term "sustainable" by eliminating the byproducts that too often flow from market capitalism currently—poverty, injustice, and environmental degradation.12

Adoption of the term "sustainable investing" as defined by Keefe represents a mainstreaming for SRI, as it blends the core SRI focus on sustainability outcomes with the mainstream focus on financial outcomes. What is interesting is that the mainstream investment community is converging on the same destination, but from the other direction—integrating sustainability considerations into a traditional focus on financial factors. It is a measure of SRI's success that its methods are now embraced by the very people who previously scoffed at it.

Investing for Sustainability

Mainstream asset managers, such as Citi and Neuberger Berman, who buy stocks to fill mutual funds and other portfolios, started practicing SRI long ago to fill a niche demand. Now mainstream investment banks, which sell stocks (a much more lucrative business stream than managing funds) are embracing sustainability, with investment analysts integrating environmental, social, and governance factors into their research.

Now it is standard for mainstream analysts from such firms as Citi, UBS, and Merrill Lynch to incorporate sustainability factors into their research.

This trend dates back to 2003, when the U.N. Environment Programme's Finance Initiative commissioned investment analyst reports from mainstream financial institutions assessing the "materiality" of sustainability issues—in other words, whether they affect stock prices significantly enough to trigger a fiduciary responsibility for investors to take them into account. The result was 11 reports by such venerable firms as Deutsche Bank, Goldman Sachs, HSBC, and UBS— essentially creating a glut of research on the intersection between financial and sustain-ability issues to fill the dearth that had existed until then. The reports also covered a wide spectrum of sustainability issues, from corporate governance to emissions trading.13

In October 2004 this movement received another boost from the Enhanced Analytics Initiative, a global consortium of institutional investors set up by the Universities Superannuation Scheme (one of the largest U.K. pension funds), Generation Investment Management (chaired by Al Gore, the first firm to integrate sustainability analysis directly into financial analysis), and others. Members of the initiative offer 5-percent brokerage commis sions to the best research on so-called extra-financial (environmental, social, and governance) factors. The chance to earn real money motivated some financial analysts to become quick studies of environmentalism and humanitarianism.14

Now it is standard for mainstream analysts from such firms as Citi, Lehman Brothers, UBS, Piper Jaffrey, and Merrill Lynch to incorporate sustainability factors into their research. JPMorgan has even established a dedicated Web page for its climate change-related research. The Goldman Sachs report released at the July 2007 U.N. corporate responsibility summit exemplifies the strategy of assessing sustainability performance not in isolation but in conjunction with financial metrics.15

Many in the SRI community—including Michael Kramer, managing partner and director of social research at Natural Investment Services—consider the mainstream embrace of sustainability a mixed blessing. While Kramer acknowledges that the Goldman Sachs report and others like it are part of the solution due to their influence over the mainstream corporate community, he laments that they advance "such broad interpretations of sustainability now that it renders the concept nearly meaningless." When a major oil company invests modestly in renewable energy while its business model still hinges on fossil fuels, is this really sustainable?16

Yet modest support by a giant may do more to advance sustainability than a small renewable energy company with a deeper commitment to sustainability. In practice, in any case, this is not necessarily an either/or equation, as both dynamics are happening simultaneously. In the end, the achievement of true sustainability will require a convergence of both bottom-up and top-down transformations, with investment playing a significant role in both.

Investing for Sustainability

One innovative way of moving toward truly sustainable investing from the bottom up is called "regenerative investing," a notion pioneered in 2003 by Michael Kramer. He calls the new investment style "regenerative" because it channels financial resources into projects that mimic the way nature operates within closed-loop systems that recycle matter and energy. Regenerative investing gives priority to far-sighted investments in areas such as clean energy, sustainable agriculture and forestry, recycling, and green real estate development. The strategy also looks for local investment that supports formal barter networks and currency systems, small business incubators, property leasing systems, and land trusts. At this early stage, regenerative investing strategies carry significant risk and so are only open to "qualified" investors with enough assets to buffer the risk.17

Solar Panel Basics

Solar Panel Basics

Global warming is a huge problem which will significantly affect every country in the world. Many people all over the world are trying to do whatever they can to help combat the effects of global warming. One of the ways that people can fight global warming is to reduce their dependence on non-renewable energy sources like oil and petroleum based products.

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