Retail Banking

Retail Banking

Opinions expressed on this blog reflect the writer’s views and not the position of the Capgemini Group

Returns with a conscience: what is Socially Responsible Investing (SRI)?

Socially Responsible Investing (SRI) is ‘an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns.’

How did it develop?

SRI (as we now know it) can trace its roots back to the 1960s; very much framed by the political climate, it ushered in greater social and environmental awareness and allowed ‘pan-nationalism’, the spirit of a ‘global community’ and civil rights movements to thrive. This idea of socially responsible investing and funding was perfectly illustrated by students who opposed the Vietnam War calling on universities to divest from military contractors.

This generation carried their approach and mind through to the corporate world, manifesting in the first SRI focussed investment funds being set up in the 1980s, mainly in the UK and US. A SRI fund is one which only invests in selected financial products or companies that are screened and rated as sustainable, environment-friendly and responsible by the asset / fund managers.

As an example, Parnassus, acquired a stake in Mondelez International after it announced an investment of $400m to help one million people in cocoa farming communities, citing their ‘sustainable competitive advantage… and strong environmental, social, and governance (ESG) profile’ as key investment drivers’. Today, SRI has the biggest market within developed countries and there is renewed interest following the last financial crisis, as many people have moved away from a sole focus on returns, even at the expense of greater conduct risk. SRI prohibits investing in such risky, and at times ethically questionable, financial products.

What does it involve?

SRI involves a rigorous screening process for potential investment opportunities, which could be in relation to the procurement process of raw materials, supply chain, the manufacturing process, facilities and working conditions, the corporate culture or the product’s use, it all matters. Following an assessment and a rating, investors decide whether it is worth investing in, this also takes into account returns, but more importantly their ESG factors.

The criteria is wholly dependent on the fund’s investment policy, as with London School of Economics, but in the instance of asset management for clients, this can also be changed according to the clients’ views or specific requests e.g. principles of Islamic finance. An example of another method to identify prospective SRI candidates is the use of existing indexes, for example, the Domini 400, an index which includes 400 companies that have met certain social and environmental standards. This index is fairly comprehensive and has performance which, on average, has been higher than the S&P 500 since the 1980s.

Does SRI have a positive impact on investors and companies themselves?

Some argue that SRI also promotes business with greater social / public utility, as it excludes products such as weapons, tobacco and alcohol. In addition, an SRI fund would not hold stocks of a company which did not take into account, or uphold ESG (Environmental, Social and Governance) criteria or Corporate Social Responsibility policies. Some may think having a ‘social conscience’ and conducting more complex screening would lead to lower but more sustainable financial return. However, the former is not demonstrated by research, which generally shows that average returns are similar, or higher, than with non-SRI products. In 2015, a report by the Morgan Stanley Institute for Sustainable Investing found that in the US, ‘investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments’. Forbes highlights that $1 out of every $9 under professional money management falls into the socially responsible investing category, making a total of $6.57 trillion invested sustainably up to 2015. All of this underpins that SRI has gone from a niche investment type to something more common and powerful.

Focusing on ESG factors also has tangible benefits for the companies themselves, as they are encouraged to push beyond regular CSR initiatives, which leads to a better reputation, market perception and potentially more opportunities for sales.

In a nutshell, SRI performance is on par with that of regular investment, and enables investors to invest in line with their personal values. There is also a clear social and public ‘good’ as it drives companies to review processes and adopt ESG criteria in their organisation’s thinking.

About the author

Carole Boissat
Carole Boissat
Carole is an Associate Consultant in the Business Model Transformation Practice, with a focus on Strategy & Operating Model. Her knowledge and delivery expertise lie within the Financial Services industry.

Leave a comment

Your email address will not be published. Required fields are marked *.