Basically, Socially Responsible Investing refers to investing that takes environmental, social and governance (or what is often known as ESG) considerations into decision making, whether from a risk or opportunity standpoint, and that will be our ongoing definition.
But Socially Responsible Investing is a very broad phrase, which encompasses everything from funds with a religious mandate to portfolios which invest in alternative energy or water technologies. As a result, as we sought to clarify in our first book on the subject in 2008, Sustainable Investing: The Art of Long Term Performance, Socially Responsible Investing includes investment strategies which perform one or more of the following techniques:
- Ethical, Religious, Environmental or Socially-focused Negative Screening
- Positive or Best-in-Class Screening
- Impact or Community Investing
- Thematic Investing
- Engagement & Advocacy
- ESG Integration
- Norms-based Screening
In the US, the field has its roots in divesting from South Africa during the Age of Apartheid, which it can count as a first success. Even earlier, some investors starting getting interested in this subject through divesting from companies involved in some way with the Vietnam War, which is arguably a bit more controversial. All of this is to say that the field in the US has its origins in negative screening approaches, which has continued to the present time in areas of concern such as the Sudan.
Negative approaches tend to stress the values of individuals first and foremost, with value a secondary concern. Negative screening is most commonly practiced by screening out entire sectors of concern such as alcohol, weaponry or fossil fuels. Such approaches have not performed terribly well, which should not be a surprise, as these approaches are not designed to maximize financial performance. Another phrase used more commonly in Europe for such values-first approaches is Ethical Investing. Also seen mostly in Europe is the related Norms-based Screening, using for example, companies involved with the UN Global Compact who have not been found to be in violation of their ten principles, for example, which we see mostly in Scandinavian approaches to investing with ESG factors in mind.
For most of the history of Socially Responsible Investing, negative screening has remained the dominant approach, leading to misperceptions about the entire field, but this is starting to change.
More recently, positive approaches that seek value and outperformance first and foremost, using sustainability factors as a driver, have seen growing success, and we will outline some recent examples in our next piece.
Sustainable Investing is often an interchangeable phrase with Socially Responsible Investing, but as we have written in our three books, we see it as a forward looking approach to investing. Some such as Matthew Kiernan, formerly head of ESG data provider Innovest, now also call this “Strategically Aware Investing,” as he wrote in our second book Evolutions in Sustainable Investing, and as discussed during a recent excellent webinar done with Concordia University in Montreal, in conjunction with their Sustainable Investment Professionals Certificate (SIPC) program, and the Network for Sustainable Financial Markets.
Responsible Investing is another common phrase, and it often combines investing with engagement practices, often resulting in filing and standing behind shareholder resolutions with companies surrounding areas of concern such as executive compensation, climate change risk and human rights concerns. Engagement can be a standalone strategy deployed by pension funds who otherwise own the market passively as so called “universal owners,” or it can also be combined with active investment strategies.
Impact Investing once again is a potentially interchangeable phrase to Socially Responsible Investing, which is to say that there is a stated desire to positively impact an environmental or social area of concern, in combination with achieving some degree of financial return. Often, Impact Investing constitutes a form of project finance, where for example, a First Nation in Canada could seek funding for a wind farm – this would potentially satisfy the three areas of an Impact Investment, which include: seeking a community or local benefit, coupled with an environmental benefit (energy produced with a lower footprint), and a financial return over time. And so Impact Investing can both describe a smaller set of projects, or the entire field, which arguably shares these goals.
Thematic Investing typically focuses on more granular issues such as renewable energy, efficient transportation, water technology and sustainable agriculture among other areas of focus.
In the end, the terminology is not important. What is needed is more investment into portfolios and vehicles which encourage better environmental, social and corporate governance behavior given the megatrends we are growingly concerned about in so far as the climate, the economy and human rights issues are concerned. We will next highlight examples where these approaches are starting to prove to be wildly successful. The challenge for Socially Responsible Investing is to not be seen as other from the mainstream, rather, the goal should be to replace it.