Ahead of Salt’s finance event in September, we take a look at the second part of the Disrupting Finance series: socially responsible investing (SRI).
So what is socially responsible investing?
SRI is an investment strategy that seeks to have a positive social or environmental impact, as well as a financial return. Often described as ‘conscious’, ‘green’, ‘ethical’ or ‘sustainable’ investment, SRI is booming due to increasing discontent with the established economic system, and growing enthusiasm for a more ethical approach to finance.
US SIF, America’s Forum for Sustainable and Responsible Investment, defines it as “an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact”.
And how is it actually applied?
Application includes shareholder advocacy, community investing, mutual funds and ETFs, and government-controlled funds. Investors may put their money into companies or governments that they believe share their values and do not engage in certain unethical practices, while in a shareholder advocacy system, they can impact corporate decisions and help mitigate negative impacts.
Community investing consists of financing community organisations that may have been denied access to capital, providing poor or underserved communities with better food access or education, for example.
Does SRI actually pay?
Despite the obvious social and environmental benefits, people can be hesitant as they believe there’s a premium to be paid for responsible investing.
However, many argue that any restricted opportunities caused by the ‘smaller investment universe’ of SRI, are more than made up for in other areas.
RBC Global Asset Management explained: “Supporters of SRI readily admit that the application of ESG considerations will reduce investment opportunities – after all, the raison d’être of SRI is to exclude “irresponsible” companies from consideration – but argue that their integration into the investment process delivers benefits that more than offset the loss of portfolio efficiency caused by the more limited investment set.
“Socially responsible investors believe that integrating ESG factors into the investment process will eliminate companies that are expected to perform more poorly than their competitors. Excluded companies are engaged in unsustainable activities or practices that will make them less profitable over time.
“In other words, companies that embrace corporate social responsibility (CSR) will deliver better financial performance than competitors that do not, and market participants systematically overlook these positive factors.”
What’s the market worth?
The global sustainable investment market is growing fast. According to the The Global Sustainable Investment Review 2014, a collaboration between members of the Global Sustainable Investment Alliance and the Japan Social Investment Forum, at the outset of 2014 it was worth $21.4 trillion. This grew from $13.3 trillion at the outset of 2012, while the same time period saw the proportion of professionally managed assets covered by SRI rise from 21.5 per cent to 30.2 per cent. The fastest growing region over the two years was the US, followed by Canada and Europe; these are also the three largest regions for assets.
And what’s the state of SRI in the UK?
According to the Eurosif 2014 SRI study, the UK is Europe’s largest sustainable and responsible investment market, worth around £1.4 trillion. The study called it “a world leader” with a wide range of techniques and approaches, and evolving and potentially supportive legal developments.
The UK’s expertise is linked to NGO presence and research, and developing views in society, with debate stimulated by mainstream politics in areas such as wealth creation, wealth distribution, fracking and airport expansion.
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