SRI Basics: Part One

104465204What is sustainable and responsible investing?

Sustainable and responsible investing (SRI) is an investment discipline that considers environmental, social and corporate governance criteria (ESG) to generate long-term competitive financial returns and positive societal impact. Today, more than one out of every nine dollars under professional management in the United States—$3.74 trillion or more—is invested according to SRI strategies.

Individuals, institutions, investment companies, money managers and financial institutions apply SRI strategies across asset classes to promote stronger corporate social responsibility, build long-term value for companies and their stakeholders, and foster businesses, generate jobs or introduce products that will yield community and environmental benefits.  The institutions involved in SRI include corporations, universities, hospitals, foundations, insurance companies, public and private pension funds, nonprofit organizations and religious institutions.

There are several motivations for sustainable and responsible investing. Some investors are driven by their personal values and goals, their institutional mission or the demands of their clients, constituents or plan participants; they aim for strong financial performance, but also believe that these investments should be used to contribute to advancements in social, environmental and governance practices. They may actively seek out investments—such as community development loan funds or clean tech portfolios—that are likely to provide important societal or environmental benefits.  Some investors embrace SRI strategies to manage risk and fulfill fiduciary duties; they review ESG criteria to assess the quality of management and the likely resilience of their portfolio companies in dealing with future challenges. Some are seeking financial outperformance over the long term; a growing body of academic research shows a strong link between ESG and financial performance.

Just as there is no single approach to SRI, there is no single term to describe it. Depending on their emphasis, investors use such labels as: “community investing,” “ethical investing,” “green investing,” “impact investing,” “mission-related investing,” “responsible investing,” “socially responsible investing,” “sustainable investing” and “values-based investing” among others.

What are the approches investors typically utilize in SRI?

Traditionally, responsible investors have focused on either one or both of two strategies. The first is ESG incorporation, the consideration of environmental, community, other societal or corporate governance (ESG) criteria into investment analysis and portfolio construction across a range of asset classes.  An important segment, community investing, seeks explicitly to finance projects or institutions that will serve poor and underserved communities in the United States and overseas.  The second strategy, for those with shares in publicly traded companies, is filing shareholder resolutions and practicing other forms of shareholder engagement. Sustainable investing strategies work together to encourage responsible business practices and to allocate capital for social and environmental benefit across the economy.

As many of you know, we at Principled Solutions have been managing socially responsible portfolios for decades.  Give us a call if you are interested in learning more.

Reprinted from The Forum for Sustainable and Responsible Investment