The ‘what?’ and the ‘why?’ of SRI

Expert opinion

In its broadest sense, ethical or socially responsible investment (SRI) is the application of both positive and negative ethical, social and environmental criteria in the management of investment portfolios. As a means to support investors’ ethical mandates whilst simultaneously seeking to generate favourable rates of return, SRI currently equates to over 25% of global assets under management: ethical investing is no longer considered to be a fringe interest.

SRI as a process provides investors with the means to identify those companies proactively implementing or adopting responsible codes of practice, and works to generate an investment environment that encourages businesses to reduce social or environmental harm in their operations. While investors can simply choose to avoid a particular company or sector, this kind of exclusion deprives the outgoing shareholder of the voting rights they could otherwise employ to further their demands for change. A more immersive process of engagement, escalating from dialogue to exclusion as a last resort, allows companies the time and space to respond to investor demands and ensure that provision is made for them to invest in social or environmental improvements. Investors are increasingly influencing the direction and scope of legislative measures placing greater emphasis on social and environmental responsibility, further promoting that ‘race to the top’ for companies to investigate and adopt effective solutions. In such an environment, companies meeting the needs of a changing world, whilst demonstrating strong social and environmental management and good corporate governance, are likely to be good long-term investments.

Concurrent to the evolution of SRI has been the creation of widely-adopted performance indicators helping investors to gauge the delivery of a given company’s financial returns against its adherence to responsible environmental, social and governance (ESG) commitments. As diverse as the risks to companies are, all are becoming increasingly aware of the financial and reputational implications of falling short of ESG expectations. The broader significance of this evolution is also reflected in the development of the United Nations’ six Principles for Responsible Investment (UNPRI), a set of “voluntary and aspirational” investment principles launched in 2006 to provide possible actions for incorporating ESG factors into investment practice. UNPRI currently has over 1750 signatories from over 50 countries, equating to almost $70 trillion of assets under management.

Alongside this is the mounting evidence that SRI has become a profitable force for positive change in the world. Despite mainstream scepticism, independent research over the long-term has demonstrated that SRI strategies have either matched or exceeded the performance returns of comparable, non-ethical investments: Morgan Stanley’s KLD 400 Social Index, for example, has outperformed the S&P 500 index on an annual basis since its inception in 1990, and a 2014 study conducted by Oxford University found that companies operating at a high level of sustainability significantly outperformed their mainstream counterparts over a twenty-year data period. It is therefore a misconception to believe that values-driven investment inevitably reduces the scope for good, consistent returns.

Impact-wise, the power of the collective investor voice has been reflected in a number of enormously significant legislative actions in recent years. Investor influence played a major part in the run up to the Paris Agreement on climate change, helped generate momentum for the eventual passage of the Modern Slavery Act and has been active in seeking solutions to improve global dietary health: the forthcoming sugar levy on soft drinks, for example, has already prompted some producers to reduce sugar levels in their products ahead of implementation in order to register below the taxation threshold. Investor engagement with individual companies – particularly evident in resolutions tabled at AGMs – is likewise helping to generate new levels of standardisation and improved transparency and ESG-driven benchmarks for those companies and their relevant sectors to focus on.

The key players identifying the opportunities evident in SRI hints at the strong likelihood of significantly increased values-driven investing in the future. Millennial investors in particular have an appetite for sustainability that manifests itself in changing consumer trends, resulting in a wider adoption of SRI and a greater realisation of its long-term benefits. Similarly, recent political upheaval and uncertainty in Europe and the US has only served to demonstrate the determination across the private sector to defy administrative back-tracking and continue to advance the progress of sustainability.

Read more at Rathbone Greenbank.

This expert opinion is tagged under:

  • Impact measurement
  • Next generation philanthropy
  • Philanthropy stats & trends
  • Promoting philanthropy
  • Social investment
  • Understanding philanthropy