“Ethics is knowing the difference between what you have a right to do and what is right to do.”
~ Potter Stewart of “I know it when I see it” fame. United States Supreme Court Associate Justice, 1915-1985.
Question: I’ve been reading about sustainable investing. Is this the same as socially responsible investing?
Answer: The answer to your question is yes and no. The main difference between the two is that sustainable investing looks for certain criteria in more inclusive ways while socially responsible investing (SRI) excludes certain investments.
The textbook definition of sustainable is the capability to maintain something at a steady level without exhausting natural resources or causing severe ecological damage. Sustainable investing highlights companies that meet environmental, social, and governance (ESG) standards. More asset managers are adding this criteria to their mix in response to increased investor awareness and recognition of ESG principles.
Socially responsible investing (SRI) dates back to the 1700s with the Quakers who avoid “sinful” companies associated with tobacco, liquor and guns. Over the years, increased concern for workplace conditions, labor issues, and women’s rights prompted growth in SRI initiatives. Socially responsible investors chose to avoid so-called sin stocks and not invest in companies related to alcohol, tobacco and firearms. The SRI definition has expanded to other sectors including gambling, adult entertainment, oil, nuclear power, pharmaceuticals and cosmetics, (cruelty to animals), stem cells and contraceptives.
When socially responsible investing first came on the scene, investors understood that they’d likely sacrifice performance for principles. The question remains; is it possible for publically traded companies to have a positive impact relative to ESG gauges and still be competitive in the long-term?
By factoring environmental, social and governance (ESG) criteria into investment decisions, investors hope to improve the risk/return characteristics of their portfolio. But is it logical to expect a stronger bottom line and reduced risk from ESG focused companies? Does environmental friendliness, treating employees fairly and having a strong governance system translate into positive outcomes?
The hope is yes, that aligning personal values with portfolio management produces favorable results.
The challenge in quantifying corporate intentions or measuring responsibility in a standardized way makes it difficult to form meaningful comparisons. For instance, we’d need to agree to definitions of “ethical supply chain management” or “clean energy,” both which may mean many things to different people.
Furthermore, what sort of policies need to be put in place to monitor these guidelines? You can see why this is a conundrum.
That’s why the Sustainability Accounting Standards Board (SASB) started in 2010. The SASB is a non-profit organization made up of business leaders from the technology, industrial, and financial sectors along with academic professionals. Their goal is to standardize and quantify the SRI evaluation process while providing industry specific, focused and relevant decision making information.
Harvard Business School, the Harvard University Initiative for Responsible Investment and the SASB study the relationship between sustainability and performance. There is a need for their services because individual reporting and self-examination may not always be accurate.
Sustainable investing has evolved over the years, from strict avoidance of sin stocks to a more holistic approach of identifying good corporate citizens. Strategies and methodologies are varied but the common denominator is a commitment to environmental responsibility, social and community involvement, employee relations, health and safety, supply chain management and finally, governance practices with a common theme of pursuing a greater purpose. One unique example is a portfolio started by Sallie Krawcheck, a former high level executive with several Wall Street firms. The investment was the first of its kind based on global gender equality owning companies that have high ratios of women in senior management or on the board.
As with all investment strategies, SRI and ESG investing is subject to risk and you could lose money. These strategies may underperform investments not restricted by social policies. Financial institutions offering these strategies may use different methodologies and definitions. There are many considerations when it comes to sustainable investing, so work with your financial advisor to find the approach that works best for you. It’s safe to start by examining your ethical threshold and then knowing what you own and why you own it. Stay focused and invest accordingly.
This information is general in nature and is not a recommendation of any particular investment. There is no guarantee any particular investment strategy will be successful. The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. To determine which investment is appropriate please consult your financial advisor prior to investing.
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This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email firstname.lastname@example.org. Website: www.raymondjames.com/Darcie.