Socially responsible investing (SRI), ethical investing, ESG (environmental, social, governance), clean tech, green investing, sustainable investing… There is no doubt that all of us, the members of the investment community, as well as investing public at large, are increasingly noticing these concepts have truly been taking hold. Despite the confusion among the plethora of definitions and terminology, for some practitioners sustainable investing has been a way of action for at least a couple of decades.

In Canada specifically, SRI in many of its interpretations and applications has established a strong, long-standing foothold. Some examples include: Acuity Funds; the Jantzi Social Index; Legg Mason Canada (through its affiliate Global Currents and ClearBridge Advisors); the Ethical Funds; Inhance/IA Clarington; Meritas Funds; the Toronto-headquartered Social Investment Organization¹ (SIO); and many more.

So important is the topic, it seems that industry conferences nowadays rarely miss a chance to add a speaker or a panel on SRI to the agenda.

Additionally, industry forums fully dedicated to the subject have become common both in Canada and globally.

The CFA Institute Centre for Financial Market Integrity issued Environmental, Social, and Governance Factors at Listed Companies: A Manual for Investors, in 2008. In light of the growing importance of “non-financial” valuation factors, the publication aims “to help investment professionals identify and properly evaluate the risks and opportunities ESG issues present for Investors in Public Companies and in the process clarify the relatively sparse and inconsistent information provided in current financial statements.”²

Are we witnessing SRI – not a fringe concept any more – increasingly penetrating the fabric of our industry and becoming mainstream? I borrowed the wording for the title of this article from a fascinating book, Sustainable Investing: The Art of Long-Term Performance,³ probably one of the most comprehensive accounts on evolution of SRI available today. Only with time will we know the answer: Despite the obvious benefits of adopting SRI and its widening appeal, there remains a camp of investors and portfolio managers firmly set only on the generation of returns.

Most SRI advocates assert that just making money while ignoring ESG factors may simply become no longer possible as one might be left behind the curve. Michael Dieschbourg, CEO and head of ESG Investments at Global Currents Investment Management, believes that all investing eventually will organically incorporate ESG/SRI as part of the process.

At Legg Mason Canada’s THINK Symposium last November, Michael detailed how ESG is becoming a value added source of knowledge for those investors who integrate the risk and opportunities into their investment process. This leads them to invest in great global companies that either have an advantage over their competition due to lower operating costs, have less negative regulation or restrictions, or are benefiting from the tremendous growth of new environmental services and products.

Indicators of wider, large scale adoption of SRI and high profile and government support are numerous. The most notable is the 2006 United Nations “Principles for Responsible Investment”, which now has over 700 signatories world-wide and close to US$20 trillion in assets committed to the six principles.⁴ The worldwide Carbon Disclosure Project, launched in 2000, now has 2,500 organizations in some 60 countries measuring and disclosing their greenhouse gas emissions and climate change strategies.⁵ Carbon risk is an example of an ESG factor that has both a financial impact and affects stock prices.

In the U.S., members of the Social Investment Forum – a non-profit association for professionals, firms and organizations dedicated to advancing the practice and growth of SRI – integrate environmental, social and governance issues into portfolio selection analysis, shareholder advocacy, and community investing.⁶ In Canada, other examples abound in addition to the SIO mentioned above; of particular interest is “The Global 100: Most Sustainable Corporations in the World”, which was created by four groups, two of which are Canadian: Corporate Knights, a magazine for clean capitalism, represented by Toby Heaps, and Dr. Matthew Kiernan’s Inflection Point Capital Management. Mike Dieschbourg of Global Currents and Bill Taki of Phoenix Global Advisors contributed from the U.S. The Global 100 aims to “create a virtuous cycle where the most sustainable companies attract the most capital.” ⁷

Dave Turner, of Toronto’s Turner Risk Consulting, who is helping socially responsible companies manage risk, shared with The Analyst his concurrent view from the companies’ perspective. “Over the past five years it has been clear that adopting a ‘triple bottom line (people, planet, profit)’ approach to how corporate performance is measured has certainly become more mainstream. Attention to all stakeholders impacted by the business–both internal and external–demonstrates a commitment to social responsibility and an organizational discipline that needs to be imbedded into growth planning at the highest strategic level. No longer can companies be purely profit focused – it is clear that equal emphasis on people and the planet will result in superior performance as measured by a greater set of stakeholders including shareholders. The companies that realize this early, and integrate it enterprise-wide will be these ones that win the day.”

SRI today is not only a relevant but also a practical issue in our work as investment industry practitioners and CFA charterholders. SRI is already providing novel career direction opportunities for investment analysts (for example, specializing in sustainability analysis). Of note is NYSSA, which has the oldest and largest committee on sustainable investing amongst the CFA societies, and has been holding programs for its members on the intersection of financial and sustainability analysis. Investment Advisors increasingly encounter growing SRI awareness from their clients, and often get explicit requests for responsible investing strategy choices–be they individual investors or quasi-institutional organizations such as churches or schools. In the institutional, non-profit and pension space, the most prominent issue is that of fiduciary responsibility – making responsible, sustainable investment decisions today affects what kind of legacy is created for the beneficiaries and the generations to come.

ClearBridge’s McQuillen, who was closely involved with the United Nations Environment Programme Finance Initiative’s 2009 report Fiduciary responsibility: Legal and practical aspects of integrating environmental, social and governance issues into institutional investment, and other publications, hopes that these sources would enable trustees and asset managers to start having the discussion about ESG risks and opportunities. “When it comes to ESG integration for the asset owner, consultant, and asset manager, having the discussion is the first part of the process.⁸ The conclusions have been that as long as the fiduciary conducts his/her normal due diligence on the investment process, then also considering ESG factors would not be a violation of fiduciary duty, and in many jurisdictions, would be encouraged or required.”

“…all investing eventually will organically incorporate ESG/SRI as part of the process.”
– Michael Dieschbourg;
CEO and head of ESG investments
Global Currents Investment Management

Last but not least, what must be addressed is a frequent criticism and results of some performance studies that elude that applying SRI/ESG principles necessary reduces investment performance. To put this issue in perspective, we must first understand the history of SRI and its evolution.

The original, traditional SRI funds have generally been characterized by the application of negative screens based on beliefs or convictions to investment selection – indiscriminately disqualifying entire industries such as alcohol and tobacco, gambling, military supply, etc. The evolution of sustainable investing more recently created a distinct dual approach, simultaneously pursuing the best opportunities that arise, for example, from the threats of climate change or water shortages, while at the same time seeking to avoid the risk in securities and industries that will most likely be affected negatively by environmental, social or governance issues.⁹

Says Global Currents’ Dieschbourg: “We look at SRI investing from both risk reduction and alpha generation perspectives: For example, selecting energy companies that are extracting oil in the least damaging way possible. Another example, pushing companies to improve shareholder engagement is at least as important now as negative screening. SRI is about putting money and capital in the hands of people who are doing the right thing.”

As such, it is not prudent to lump all SRI strategies together for comparison purposes. Investment consultants are overwhelmingly on board with this view. Roger Urwin, global head of investment content at Towers Watson, argued that “The impact of ESG factors on investment returns had reached a ‘tipping point’, based on the progression of climate science and increasing evidence of natural resource depletion […] Investing in sustainability mandates could act as a hedge against the potential impact of climate change on other investments in institutional portfolios.” ¹⁰

The UNEP FI and Mercer report, Demystifying Responsible Investment Performance, analyzed performance that spanned various cases of E, S, G, or all three, as well as different asset classes and investment vehicles. Mercer concluded in 2007 and again in 2009 that “the belief that responsible investing (RI) will automatically limit the investment universe and thereby limit returns is narrow in its focus and conclusion. RI is a broader practice… A full assessment of the merit of taking a long-term responsible approach to investment needs to consider the relative merit of each approach…”¹¹

In the meantime, sustainability is already affecting and shaping choices not just in equities and its niche opportunities such as water or clean energy, but in other asset classes as well, including fixed income and micro-finance, sustainable property development, and private equity.

¹ http://www.socialinvestment.ca/
² Environmental, Social, and Governance Factors at Listed Companies: A Manual for Investors. (CFA Institute, 2008)
³ Sustainable Investing: The Art of Longterm performance; Krosinsky, Cary and Robins, Nick. (Earthscan, 2008)
⁴ http://www.unpri.org/
⁵ https://www.cdproject.net/en-US/WhatWeDo/Pages/overview.aspx
⁶ http://www.socialinvest.org/
⁷ http://www.global100.org/
⁸ Sucheta Rajagopal, SRI Monitor blog, November 6, 2009
⁹ Sustainable Investing… p.20
¹⁰ http://www.responsible-investor.com/home/article/towers_watson/, 10 February, 2010
¹¹ Shedding light on responsible investment: Approaches, returns and impacts (November 2009), © Mercer LLC.