Financial Planning for December 2017
High Concept Strategies: Socially Responsible Investing
This is the third in a series of articles discussing various types of high-concept investment styles. This month we tackle socially responsible investing.
Socially Responsible Investing (SRI) is just what it sounds like – putting your money where your mouth is. If you are concerned about environmental issues, healthcare, debilitating diseases, labor abuses or even buying domestically manufactured products, SRI identifies companies that align with an investor’s values.
Also referred to as sustainable, responsible and impact investing, this approach seeks more than just a monetary return on investment; it promotes investment in companies that take a proactive stance on environmental, social and corporate governance issues. This includes companies in the following types of industries:
In addition, SRI extends to companies in other industries that employ strict operational practices with regard to diversity, transparency, workplace benefits and/or safety.
Today in the United States, more than 20 percent of professionally managed money is invested in SRI strategies. In recent years, this charge has been driven largely by members of the millennial generation, which has been quick to identify long-overlooked issues that are beginning to have a direct effect on their own lives and careers.
A new survey revealed that nearly 50 percent of recent graduates from the Wharton School of Business who went on to start their own businesses have implemented various forms of social benefit as part of their business model.
Socially Responsible Yardstick
To identify socially responsible companies, the industry has developed guidelines for various Environmental, Social and Governance (ESG) Criteria. For example, if an investor is focused on environmental concerns, he would review a company’s policies for energy use, waste, pollution, natural resource conservation and animal treatment. It is also prudent to evaluate how various environmental risks could impact the company’s revenues and explore the strategies the company uses to mitigate those risks.
For an investor with more societal concerns, it is important to investigate the business relationships of each prospective company. For example, what types of companies comprise its supply chain, and do those companies possess the same values? Find out if the company donates any of its profits to certain causes or the local community, and does it encourage employees to engage in volunteer work? Also investigate whether or not the company itself values its employee’s health and well-being with regard to workplace conditions, health insurance and other benefits, and competitive wages. Does it make a special effort to hire less-attractive job candidates, such as ex-convicts, people with disabilities or immigrants? And finally, the marketing of the product or service it provides may offer societal benefits. For example, perhaps it is priced for low-income accessibility.
Governance is relatively easy to gauge because it will be evident if the company practices transparency and accessibility with regard to accounting methodologies. Inquire as to what types of issues common stockholders are permitted to vote on, and research members of the board of directors to see if any have potential conflicts of interest. And finally, find out if the company uses political contributions to lobby for favorable treatment.
The sustainable and responsible investment approach spans a variety of products and asset classes, including stocks, fixed income, private equity, venture capital and real estate. Fortunately, for investors who want to be socially responsible but do not want to have to conduct due diligence on every investment, there are SRI mutual funds that do the work for them. Presently, there are more than 200 SRI funds available to investors. To learn more about investment options, check out the Forum for Sustainable and Responsible Investment (ussif.org).
Another advantage to socially responsible investing is that performance is not generally sacrificed to meet SRI goals. Over the past one-year, three-year, five-year and 10-year timeframes, the KLD 400 Social Index has kept pace with the MSCI USA Investable Market Index. Over the past 10 years, research has shown no negative correlation between a company adopting a socially responsible management approach and its stock performance.
With no notable difference in performance emanating from SRI standards, it is easy to imagine these companies will attract more investors moving forward. We could even reach a point where not adapting a socially responsible corporate strategy could actually become a deterrent for investors. But for now, SRI is enjoying a healthy growth rate with a more than 33 percent increase from 2014 to 2016.