Sustainable and Responsible Investing

Evaluating strategies that reflect Personal Values

Growing investor interest has helped move sustainable and responsible investments (SRIs) into the mainstream.  Assets invested according to SRI strategies grew to $3.74 trillion in 2012 – up 22% from 1020 – and SRIs represented about 11.3% of professionally managed U.S. Assets.

Today there is a broader interpretation of “sustainable” and “socially responsible” investing.  Typically, it comprises approaches that integrate environmental, social and governance (ESG) factors with more traditional financial analysis methods.  There is also wider recognition that social environmental policies can affect a corporation’s bottom line.

Put simply, more investors seem to be actively seeking companies that do well and perform well over the long term.

Data-Driven Decisions

Many SRIs exclude investments in the Sudan, or they might avoid companies or industries that profit from certain products or services (e.g. Tobacco, alcohol, weapons, nuclear power, gambling).  It’s important to keep in mind that different criteria may be used by SRI companies. 

Many corporations have started to collect and report ESG information and various services that provide research and ratings for investment analysis are beginning to verify this type of data and make it available to the public.  Examples of common ESG concerns include, but are not limited to, pollution control, natural resource conservation, energy efficiency, employee relations, respect for human rights, health and safety, regulatory compliance, and public disclosure.

More transparency regarding corporate sustainability issues may give investors the ability to compare how businesses in the same industry have adapted their strategies and practices to meet social and environmental challenges, and possibly provide some insight into which companies may have a competitive advantage.  In some instances, good corporate citizenship may help create value.

 

Common Practices

Most SRI strategies use one or more of the following methods.

Screening: invoices selecting or avoiding investments in companies based on whether they help protect or cause harm to the environment or society.

Shareholder activism: describes the efforts to influence a company’s management to adopt policies or cause harm to the environment or society. 

Shareholder activism: describes efforts to influence a company’s management to adopt policies that help benefit workers, the community or the planet.

Community investing: provides capital directly to organizations for purposes such as lending funds to business enterprises in underserved communities and supporting economic development.

 

Notes of Caution

Socially responsible investments entail risk, could lose money, and may underperform similar investments not constrained by social policies.  There is no guarantee that a SFRI will achieve its investment objectives.

Many SRIs are broad-based and diversified.  Others, however, may focus on a narrow theme such as clean energy; therefore, they can be more volatile and carry risks that may not be suitable for all investors.

As with any investment strategy, SRI methods may limit the total universe of available investments, and investors who want to diversify their portfolios may not find a SRI that fits every sub-asset class.  Of course, individual investors may have different opinions about which policies and practices they believe have a positive or negative impact on society.

As the number of SRI options continues to expand, so does the opportunity to build a portfolio that aligns with your personal values as well as your asset allocation, risk tolerance, and time horizon.