Socially Responsible Investing (SRI) Introduction
Just because you have the chance to invest in stocks, mutual funds, and other financial products does not mean that you have to disregard your moral standards. If, for example, your religious upbringing frowns on gambling, you’d probably have to think long and hard before investing in stocks of Las Vegas gaming establishments.
The idea of making investments that meet a set of moral, ethical, or environmental guiding principles is known as socially responsible investing (SRI). Morningstar.com describes why the SRI designation is important in the following paragraph:
The general premise is to give investors peace of mind by using screens based on moral criteria that create an acceptable universe of investment candidates. Gun manufacturers, distillers, Big Oil, and some pharmaceutical companies typically fail to pass those screens. For example, a religious-themed fund might exclude a pharmaceutical company that manufactured contraception, even if that product was just one of dozens it produced.
SRI also relates to investing in companies or products that can transform society for the greater good, such as promoting gender equality or a clean and healthy environment.
In recent years, millennials, roughly defined as those born between 1980 and 2000, have been shown in surveys to be more interested in SRI than the generations born earlier. They are concerned about climate change, dependence on fossil fuels, labor practices, and other socially relevant issues. Investment organizations have noticed this trend and are starting to emphasize funds and investments that place a certain portion of investors’ money they manage in SRI sectors.
There are various terminologies used to indicate SRI, depending on the emphasis of the investors involved, such as: ESG (economic, social and governance) factor-based investing, sustainable investing, impact investing, values-based investing, community investing, and green investing. To reflect this diversity of terminology, this chapter uses the terms sustainable and responsible investing, sustainable investing, responsible investing, impact investing and SRI interchangeably.
History of Socially Responsible Investing
SRI has a long history that spans centuries. It was common among religious faiths and indigenous cultures that have long considered how their economic actions affected others around them. In the American colonies, some Quakers and Methodists refused to make investments that might have benefited the slave trade, war or conspicuous consumption, to name three examples. The earliest explicit ethical investment policies avoided so-called “sin” stocks – companies involved in alcohol, tobacco or gambling. In the early 1950s, a mutual fund called the Pioneer Fund became the first to adopt an SRI approach by avoiding investments in any companies involved in the manufacture of tobacco products, alcoholic beverages, or the operation of gambling casinos or other gaming businesses.
Before 1960, most SRI policies involved screening for “sin” stocks. However, the root of sustainable investing since then arose after the social and cultural transformations of the 1960s and 1970s, as the civil rights, feminist, consumer, antiwar and environmental movements raised awareness about social, environmental and economic problems and made the connection between corporate and investor responsibility.
The early 1970s also saw the launch of the first modern SRI mutual funds. The Pax World Fund, founded in 1971, and the Dreyfus Third Century Fund, created the next year, were the first funds to combine social and environmental consciousness and financial objectives.
In the 1980s, the anti-apartheid movement, which was opposed to the segregation policies that kept blacks and whites separate in South Africa, picked up steam. By 1993, when South African President Frederik Willem De Klerk took steps to end apartheid, hundreds of companies and institutions had withdrawn their investments in South Africa.
In recent years, a growing number of universities, faith-based institutions, foundations and others began to inquire if they had responsibilities to correct “social injury” caused by the companies in which they invested as minority shareholders. Aided by regulatory changes by the Securities and Exchange Commission, a growing band of individual and institutional investors filed the first of dozens of shareholder resolutions to raise questions about environmental and social responsibility at the annual meetings of U.S. publicly traded companies.
History of Socially Responsible Investing
The trend of Socially Responsible Investment (SRI) strategies has led to the establishment of organizations that provide information and services related to sustainability. For example, a research company called Swell Investing is collaborating with Motif Investing (a brokerage firm) to construct investment funds with themes associated with causes such as a) ending cancer, b) upholding human rights, c) fighting poverty, and d) improving education. The fact that these investment models are being created tells you that investors are looking more carefully into the nature of their investments in terms of social responsibility and impact investing.
Further evidence of this trend is that major universities, investment banks and pension funds are setting aside or allocating specific amounts of their money to socially responsible/sustainable investments.
For example, Harvard University’s $33 billion endowment (money Harvard uses to fund scholarships and run the university) recently announced that it was signing on to the Principles for Responsible Investment, an initiative supported by the United Nations that relates to SRI.
Do Socially Responsible Investments Perform?
You may be wondering whether investing in socially responsible companies or funds is as profitable as investing in other companies or funds that don’t have any particular mandates to be socially responsible. According to a report issued by the investment bank Morgan Stanley, titled Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies, investing in socially responsible companies is more profitable than investing in traditional companies.