On a beautiful Friday in September, 2019, my 13 year old daughter participated in our local Climate Strike – a 7,000 student march from Boston City Hall to the Massachusetts State House. Although I was proud of her for taking a stand against an issue about which she is passionate, I felt compelled to give her some fatherly advice. And with that, I introduced her to Socially Responsible investing.
Sustainable, Responsible and Impact investing (SRI) is an investment discipline that considers Environmental, Social and corporate Governance (ESG) criteria to generate long-term financial returns and positive societal impact. Sustainable investors aim for strong financial performance, but also believe that these investments should be used to contribute to advancements in social, environmental and governance practices.
Socially responsible investing allows investors to put their money where their mouth is. It’s hard to insist an investor is a committed environmentalist if part of their portfolio is invested in companies or industries that are destroying the environment. It’s an opportunity to withhold their investment dollars from businesses that are not acting in concert with their core beliefs and to reward companies that do.
Not surprisingly, companies respond when socially responsible investors divert their investing dollars away from them. A perfect example of this is Lego. Investors pressured them to end their partnership with Shell Oil a few years ago and it is now partnering with companies like the World Wildlife Foundation on social initiatives. They’re also working toward having 100% renewable energy capacity by the year 2030 while committing to reduce their overall carbon footprint.
A common criticism of SRI investing is that when investors limit their investment options and potentially pay more to invest in companies that practice social and ethical responsibility, they may sacrifice their return on investment. When socially responsible investing becomes the primary objective, investors intentionally reduce the universe of investments from which to choose. And let’s face it, some companies are more profitable because they engage in less responsible business practices such as paying their workers relatively low wages. The facts, however, do not support this conclusion. Per Morningstar, the most well-known SRI investment, the MSCI KLD 400 index, has outperformed the S&P500 since its 05/01/1990 inception.
SRI is becoming more and more popular. According to the US SIF Foundation's Report on US Sustainable, Responsible and Impact Investing Trends $12.0 trillion in total assets under management at the end of 2017 used one or more sustainable, responsible and impact investing strategies. From 2016 to 2018, sustainable, responsible and impact investing enjoyed a growth rate of more than 38 percent, increasing from $8.7 trillion in 2016. More than one out of every four dollars under professional management in the United States today—26% of the $46.6 trillion in total assets under management tracked by Cerulli Associates—is involved in SRI.
While socially responsible investing offers plenty of benefits, of course, there are negatives. SRI investing can have some subjectivity. Microsoft was excluded from one of the most popular SRI funds because of the way it operates its business–not because they’re dumping toxic chemicals into the water. On the other hand, the iShares MSCI KLD 400 Social ETF includes companies like ConocoPhillips (environmental concerns), Occidental Petroleum (same), McDonald’s (unfair labor practices), and Aramark (same) in their holdings. Those stocks, it can be argued, go against traditional SRI guidelines. Another example is nuclear energy. If viewed from a perspective of damage from nuclear accidents, it might be seen as one of the worst investments possible. But if it is considered to be a substitute for fossil fuels, it could constitute a socially responsible industry.
Another frustration of SRI investing is that some companies market themselves to be socially responsible when, in fact, they are not. Volkswagen is an excellent example of this. For a long time, their marketing focused on their “clean diesel” cars. In September, 2015, the Environmental Protection Agency (EPA) found that many VW cars being sold in America had a "defeat device" - or software - in diesel engines that could detect when they were being tested, changing the performance accordingly to improve results. The German car giant has since admitted to cheating emissions tests in the US. The lesson here is that just because a company says it’s socially or ethically responsible, doesn’t mean it is.
With that, I explained to my daughter that while admirable, the Climate Strike alone will not have the impact for which she yearns. We live in a capitalistic society, and it is that capitalism that provided her with the cellphone she used to record and broadcast via social media the images and videos of this event. And yes, it would be capitalism via Socially Responsible Investing that ultimately could potentially provide her and her 7,000 new friends with the Change they seek.