|Socially Responsible Investing or
Socially Responsible Investment, usually abbreviated to
SRI, is an umbrella term for a philosophy of investing by both
financial criteria and social, ethical or environmental criteria.
For some, SRI is about aligning personal values
and their financial goals by choosing to invest in companies
and organizations displaying values comparable to their own.
Others see SRI as a tool to use investor influence to achieve
social or environmentally goals. And a third category see
SRI from a purely financial perspective - as a way to profit
from, for example, the economic changes associated with climate
There are four kinds of SRI:
1. Screening, which mostly involves
excluding companies on the basis of social, ethical or environmental
criteria, but it may also involve preferentially including
companies with strong positive social features (e.g. renewable
2. Community Investing involves providing
capital to socially beneficial projects, particularly those
that would otherwise find it difficult to attract capital
(e.g. Microcredit), sometimes this is done at sub-commercial
rates of return.
3. Shareholder Activism involves engaging
with companies to seek to achieve positive changes to management
and performance. In the U.S. this is typically supported by
shareholder resolutions, in Europe more informal engagement
methods are more frequently used. This activity is often closely
related to activism on corporate governance.
4. Investment Integration involves
seeking to integrate analysis of social, ethical and environmental
criteria with conventional financial analysis in order to
maximise investment returns. (This approach is particularly
attractive to fiduciary investors, and is practiced mostly
Social investing began in the 1920s with
churches, who divested of the so-called 'sin stocks' --
alcohol, tobacco and gambling. As the ability to conduct substantive
social and environmental research on companies improved, 'negative'
or 'avoidance' screening was joined by 'positive' or 'inclusionary'
screening -- the practice of looking for companies with leading
policies and practices.
A major shift forward came with the founding
of the Interfaith Center on Corporate Responsibility (ICCR)
in the 1970's. Headquartered in New York, ICCR is an umbrella
organization that helps to orchestrate the activities of its
constituent membership -- some 285 institutions who collectively
control more than $110 billion in investment assets. ICCR
is credited with creating the South African Divestiture Movement,
and in 1978 an ICCR member filed the first shareholder-sponsored
resolution to General Motors. They continue to be leaders
in the active use of assets to express or support their members'
larger purpose in the world.
During the 1970s and 1980s a number of mutual
funds were established in the US and Europe, mostly using
the screening model. Globally these have attracted billions
of dollars of investment on behalf of millions of customers.
Since 2000 there has been a growing interest
in SRI from mainstream investors, including large pension
funds and insurance companies. In several companies (including
the UK, France and Australia) of legal requirements for pension
funds to disclose their policy on SRI. In the UK, for example,
this has led a number of large institutional investors with
several hundred billion dollars of assets to adopt SRI policies
across all their assets (mainly using shareholder activism
or investment integration methods).
PERFORMANCE: An important issue to
confront with SRI is its critics' oft-repeated claim that
social investors must sacrifice return in order to invest
more in line with their values. This has been shown to be
an unsupportable assertion, both by the 14+ year experience
of the Domini Social Index, and by a host of longitudinal
studies conducted by academic and research institutions. The
Domini Social Index was launched to be a financial mirror
of the S&P 500 Index, but with a broad range of social
and environmental screens applied. Over its nearly 15-year
history it has faithfully mirrored, and modestly outperformed,
the S&P 500.
It us useful to realize that every investment
manager (whether a mutual fund or separate account manager)
does financial analysis first. Then, once financial qualifications
are met, SRI managers conduct additional social and environmental
research. Many feel that this 'double due-diligence' gives
SRI managers insight into and the ability to avoid potential
liabilities. Others feel that a company's environmental preparedness
is a sound proxy for management's foresightedness and a harbinger
of out-performance in the future.
Of course, no market cycle consistently favors
any group or style of investing, and there are both good and
bad managers among the ranks of SRI -- just as there are among
traditional Wall Street managers. But one thing is certain
-- whenever money moves it has an impact. Socially concerned
investors try to influence those impacts, and they can successfully
do so while still being fiscally prudent and while fulfilling
their fiduciary duty.
DIVERGENCES WITHIN SRI: In recent years Socially Responsible
Investing has evolved into several approaches that are differentiated
in various ways.
Firstly, by political orientation. Progressive
SRI investors follow criteria that support a variety of values,
ranging from environmental protection to workers' rights.
The vast majority of SRI money invested (over $2.3 trillion
a/o late 2005) is invested with this progressive bent. In
contrast to this, conservative SRI investors tend to follow
criteria that mirror the values of particular religious denominations.
While there is no one standard of criteria across Socially
Responsible Investing, most SRI mutual funds, whether conservative
or progressive, employ screens that exclude companies that
manufacture tobacco or alcohol products.
Secondly, by the extent to which SRI criteria
are integrated with mainstream financial analysis and corporate
governance activism. Often because of perceived fiduciary
constraints, many institutional investors do not wish to employ
ethical screens but prefer to seek to integrate social, ethical
and environmental factors into their investment and activism.
Some have criticised these approaches to ethically weak. Their
defenders argue that they are effective at mobilising large
institutional investors who would otherwise ignore SRI.
THE FUTURE OF SRI: An important thought
leader study, The Future of Socially Responsible Investment,
was published in 2005. It captured and analyzed the 10-year-ahead
thinking of 42 of the world's leading SRI practitioners, who
collectively see SRI, and in particular Screening, as becoming
mainstream investment practice -- entirely because SRI analysis
does provide valuable insight into management's ability and
thoughtfulness. Other significant trends include the continued
growth and robustness of Community Investing, and in particular
the evolution of Shareholder Engagement as the defining factor
that distinguishes the 'Deep SRI' firm from others.