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The world of SRI - how investors can benefit


Despite its recent high profile, many investors are still ignorant about socially responsible investing and how it can benefit their business. Families in Business talks to Lisa Woll, CEO of the Social Investment Forum, to set the record straight

Do you think there is an inherent synergy between family businesses, with their traditionally long-term outlook, and SRI?

Yes. In general, SRI investors tend to be long-term investors, both in terms of the financial returns they are seeking and in terms of promoting an economy that will be sustainable throughout their lives, as well as the lives of their children and grandchildren.

Is it a problem that SRI means many things to many different people?

This is actually one of SRI's strengths. SRI provides a series of investment strategies – screening, shareholder advocacy, and community investing – that can be used by a wide range of investors in different ways. For example, some investors will focus on the environment, and may screen out environmentally damaging industries, or may use a best-in-class approach (ie, seeking to hold the most responsible companies within an industry), and/or may use "positive" screens to hold the most innovative companies in a sector (such as wind or solar). These same investors may engage in dialogue with the companies they hold, vote their proxies, and/or file shareholder resolutions.
Finally, they may invest in community investing institutions that work to create a sustainable environment. Many SRI investors are concerned about multiple issues, including human rights, labour issues, community issues, and the environment, and there are a growing number of funds and products that are active on a range of issues.

What would you say to those who dismiss SRI as another passing trend or fad?

SRI investing actually began hundreds of years ago and has been practised by various religious groups throughout that time. Modern SRI has been in existence since the 1970s and has grown tremendously since then. With over $2 trillion in assets directed to SRI in the US alone, it is definitely not a passing fad. SRI has been increasingly adopted in both the institutional and retail sectors and the industry is represented by asset management firms, advisors/planners, and mutual fund companies that are either wholly or partially devoted to SRI. The field is here to stay.

What does SRI need to do, in your opinion, to become a mainstream asset class?

SRI strategies are already being adopted in the mainstream, with a number of pension funds, endowments, and other institutional investors utilising screening, shareholder dialogue and advocacy, and investment into low-income communities. Additional investors will adopt SRI strategies as they continue to prove themselves and become better known. Client demand drives SRI and a growing number of financial services companies offer SRI services and products in response to increasing investor demand.

How far along this road is SRI at the present time?

SRI has grown tremendously in the US from approximately $40 billion of assets under management in 1984 to over $2 trillion in assets in 2005. As there is growing interest in divestment from the Sudan, climate change, and investment into low-income communities, it is likely that SRI will continue to grow in the future.

How do you persuade investors to look beyond the bottom line to judge performance?

Increasingly, investors are looking at a triple bottom line and are factoring in governance, social and environmental issues into their investment decisions. In the wake of multiple corporate scandals, and in light of the fact that many corporations are faced with exposure to environmental and social liabilities (beginning with global warming), investors are realising that simply looking at the traditional bottom line is not enough, especially for long-term investments.

If we look at individual investors, would you agree that, at the present time, limiting yourself to SRI imposes an artificial constraint on your portfolio that negatively affects performance?

Academic studies have repeatedly demonstrated that there is no downside to investing in SRI funds; their performance is competitive with unscreened funds.

Would you agree that volatility remains a problem with SRI portfolios?

Volatility is not a problem for SRI portfolios. While some SRI funds can be somewhat more volatile than their peers, which can be related to industries that they may screen out, overall SRI portfolios are not necessarily more volatile. As discussed above, studies demonstrate that overall, SRI portfolios are comparable to non-SRI portfolios in terms of financial performance.

How would you say your arguments are going down with the large money managers around the world?

SRI strategies are being adopted by more and more money managers worldwide, particularly in the US and Europe. We are seeing large pension funds throughout the US engaging in screening and shareholder strategies.

Shareholder advocacy/activism in relation to SRI is also on the rise. How do you see this phenomenon evolving?

More and more shareowners are seeing that when companies address corporate governance, social and environmental liabilities, and are first-movers on related opportunities, that these companies yield better performance in the long term. We will likely see more shareholders filing resolutions on these issues and continued growth in the number of shareholders voting for these resolutions.

With the news that China is building almost two new power stations every week, do you feel you ever feel like you are fighting a losing battle?

We do need to seriously address climate change in the next 10 years if we are to succeed in minimising its most harmful impacts. SRI investors are helping lead the way by working to promote the cleanest energy technologies and encouraging companies to address climate change in the short and long term. If energy saving and clean energy technologies can work in the west and are cost-effective, China will likely adopt them also, as the Chinese are well aware of the environmental and health implications of building new coal plants. The Chinese are already investing in clean energy, in addition to building coal plants. That being said, there is a narrow window of opportunity, and we need to develop clean energy technologies as quickly as possible.
In addition, with all the focus on China, we must not forget that the US is still the greatest emitter of carbon in the world, and that there are up to 150 coal-fired plants planned in the US. Also, there is interest in creating coal-to-fuels technologies in the US and rapidly expanding the development of Canada's tar sands, both of which will have profound impacts on climate change. So, here in the US, we need to focus much of our attention on our own continent.

What one piece of advice would you give to investors who are considering a socially responsible investment for the first time?

In the US, they may want to consider working with the growing number of investment advisors that specialise in SRI. First Affirmative Financial Network and Progressive Asset Management are two growing networks of financial advisors that specialise in SRI.

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