Why SRI investing is slated to become the norm
The past few years have witnessed major headway for sustainable, responsible and impact investment. Here's why this trend has caught on like wildfire.
Sustainable, responsible and impact investing (SRI investing) goes by many names. Whether you call it impact investing, socially responsible investing or sustainable investing, all of these investing categories fall under the umbrella of SRI investing.
SRI Investing accomplishes many things traditional investing does not. In essence, it promotes the notion that corporate value should align with quality of life factors. It offers environmental risk management, social impact and long-term viability in addition to financial returns. And in response to the naysayers who only seek to maximize profit, SRI investing correlates with better financial performance than traditional investing. With all of these advantages, SRI investing is giving traditional investing a run for its money.
What is sustainable, responsible and impact investing (SRI)?
Just as corporations record and report their financial performance to investment agencies, they typically report on their sustainability performance as well. This performance includes criteria related to environmental, social and corporate governance (ESG).
Corporations use various frameworks to monitor, track and report this data. However, the Global Reporting Initiative (GRI) is one of the oldest and most well known frameworks. Ninety-three percent of the world’s largest 250 corporations have adopted GRI to report their ESG performance.
As reporting methodologies and criteria become increasingly standardized, organizational ratings based on sustainability performance have become more reliable. However, these criteria are broad-reaching and complex.
For instance, companies may align the ESG criteria they use with specific UN Sustainable Development Goals, which are seventeen broadly defined criteria for long-term social, economic and environmental sustainability. These include diverse factors like gender equality and climate action. Given the vast range of sustainability indicators and the varying quality of the data supplied by companies, it remains somewhat challenging to effectively rate a company's performance.
To address this dilemma, the UN developed its Principles for Responsible Investment (PRI) in 2005 with a total of 20 international investor signatories and the support of 70 advisors. PRI promotes six principles for responsible investment. Currently, it is run by an independent non-profit organization. By 2006, the Principles were launched on the New York Stock Exchange with 100 signatories, whereas today that number is over 2,300.
Other well known investing data and ratings agencies that compile and evaluate corporate sustainability reporting data include:
Bloomberg ESG Data
Carbon Disclosure Project (CDP)
Dow Jones Sustainability Index (DJSI)
FTSE4Good Index Series
ISS-oekom Environmental and Social Quality Score
MSCI ESG Research
Sustainalytics ESG Ratings and Research
Thomson Reuters ESG Research Data
Vigeo Eiris ESG Indices and Rankings
How much has SRI grown over the past few years?
Globally, SRI investment has grown by 34 percent from roughly USD 22.89 trillion in 2016 to USD 30.68 trillion in 2018 in the five major markets (Europe, United States, Japan, Canada, Australia/New Zealand). Overall, Europe and the US hold the highest ratios in SRI investments at 46 and 40 percent, respectively.
In the US, there has been even higher growth of 38 percent in SRI investment from USD 8.7 trillion in 2016 to USD 12 trillion in 2018. SRI investment accounted for roughly a quarter of the total investment in the US which totaled USD 46.6 trillion in 2018.
What is driving this growth?
Simply put, return on investment has driven growth. Numerous studies have shown a positive correlation between ESG and financial performance.
Apart from this global ambition drivers including the Sustainable Development Goals and the Paris Climate Agreement may also impact institutional investment patterns.
Meanwhile popular campaigns to divest have also influenced investment decisions. In particular, the Carbon Majors Report of 2017 highlighted the top 100 companies responsible for 71 percent of GHG emissions since 1988. Companies and institutions that have made divestment commitments, may seek investments meeting verifiable ESG criteria.
Finally, a 2017 Morgan Stanley survey found that compared with average investors, millennials are almost doubly likely to invest in SRI. Investment bankers are likely eager to attract millennials' growing financial influence.
What are the benefits of SRI compared with traditional investing?
Thanks to ESG reporting, SRI investment includes a values-based dimension that ideally promotes both a maximum economic profit combined with a minimum of environmental and social risk.
As a result, SRI investing criteria simply provides investors greater knowledge about the overall activities of a corporation. This adds to their range of investment approaches and options.
One drawback is that some corporations may skew the results of their performance. But at the end of the day, they still provide more information than those that don't supply investors this data. It is easier to identify inaccurate data than make guesses where no data exists.
The ESG criteria that corporations report on generally allows investors to make well-informed decisions about their investments and the push towards greater transparency is underway.
As the saying goes, money talks. However, investors don't necessarily want their money to generate a dull, one-sided conversation. SRI investing gives investors an opportunity to influence beyond the sole dimension of profit.
What are the different strategies used within SRI investing?
While companies independently determine what areas are most material to their business model, their ESG performance is rated based on a variety of strategies.
The following definitions are provided by the Global Sustainable Investing Alliance (page 7):
Negative/Exclusionary Screening: the exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria;
Positive/Best-in-class Screening: investment in sectors, companies or projects selected for positive ESG performance relative to industry peers;
Norms-Based Screening: screening of investments against minimum standards of business practice based on international norms, such as those issued by the OECD, ILO, UN and UNICEF;
ESG Integration: the systematic and explicit inclusion by investment managers of environmental, social and governance factors into financial analysis;
Sustainability Themed Investing: investment in themes or assets specifically related to sustainability (for example clean energy, green technology or sustainable agriculture);
Impact/Community Investing: targeted investments aimed at solving social or environmental problems, and including community investing, where capital is specifically directed to traditionally underserved individuals or communities, as well as financing that is provided to businesses with a clear social or environmental purpose; and
Corporate Engagement and Shareholder Action: the use of shareholder power to influence corporate behavior, including through direct corporate engagement (i.e., communicating with senior management and/or boards of companies), filing or co-filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines.
How can I personally invest in SRI funds?
Get Tailored SRI portfolios/funds
Get Data to create a DIY SRI Portfolio
ERICA ELLER IS A FREELANCE BLOGGER, CONTENT MARKETING WRITER AND EDITOR FOCUSING ON SUSTAINABILITY.
If you liked this blog post, subscribe to Erica Eller’s newsletter for bi-monthly highlights from the blog or subscribe via RSS.