Will Socially Responsible Investing Become the New Normal?

Socially Responsible Investing (SRI)

By Kris Maksimovich

The idea of Socially Responsible Investing (SRI) has seen traction over the past few years, moving it beyond a niche market option. Some people think that SRI is just a “tree hugger” initiative, but that is an unwarranted stereotype. SRI investing is based upon investing in your values and the things that you find important.

Who is driving the popularity of SRI?

SRI has gained in popularity, particularly among millennials, for several reasons. As baby boomers transfer their wealth to younger investors, a new value system will become the driving force for SRI. Where once a portfolio was a reflection of our financial goals, a new set of standards aligning the Environmental, Social and Governance (ESG) Factors is a reflection of our personal values.

The more investors vote with their assets, the more they will persuade companies to adopt ESG standards.

Additionally, it’s hard to ignore the effects of drought on our reservoir levels. We see how these conditions routinely affect our water reservoir levels in Texas. On a much larger scale, we can look to Cape Town, South Africa as a case study in “Zero Day” effects where government officials have been forced to shut down taps and enforce severe water restrictions (Sorensen, 2017).

Win-Win

Companies that operate with an eye to ESG seem to outperform others. According to a recent sustainable investing guide published by Deutsche Bank Group, studies show that companies who adopt ESG factors have a lower cost of capital and 89% show market-based outperformance.

Investing with your values means you get to vote with your dollars and avoid companies that don’t fit with your ideals. Also important is how green finances can benefit your household. Saving energy and conserving water can help lower your bills.

What is the ESG factor?

The ESG initiative is being driven by the desire to aid communities, promote global micro-enterprising and offer positive impacts on public policy. According to the USSIF Foundation, some of the environmental, social and governance issues investors are focusing on include:

Environmental Factors

  • Climate risks
  • Energy efficiency
  • Pollution of water and air
  • Waste management
  • Sustainable forestry
  • Water conservation

Social Factors

  • Global supply chain and factory conditions
  • Human rights
  • Labor standards
  • Community relations
  • Customer satisfaction
  • Indigenous people’s rights
  • Freedom of expression
  • Equal employment opportunity

Governance Factors

  • Executive compensation
  • Corruption
  • Board and committee diversity
  • Sustainability reports
  • Lobbying
  • Corporate political spending
  • Proxy access

Green Behaviors

Making changes to include SRIs in your investment portfolio is a personal decision and one you should discuss with your advisor. But there are other ways to include socially responsible behaviors into your daily lives. The simplest way is to “go paperless” which includes:

  • Electronic bill-pay
  • Online banking
  • Think before you print
  • Opt out of preapproved credit offers optoutprescreen.com
  • Remove yourself from junk mail lists at dmachoice.org

It is likely that as more investors move their focus to SRI initiatives, more companies will adopt them, making it likely that ESG-focused portfolios will continue to enjoy growth.

Where do you start?

Begin by meeting with your advisor and explaining your primary financial goals and environmental concerns. Your advisor can help inform your decision about investment vehicles and help you sift through your current investments. By combining industry knowledge and an understanding of your priorities, your advisor can help you find the right balance of investments consistent with your values.

 

Sources

Deutsche Bank Group (2012). Sustainable Investing. [PDF]. Retrieved from https://www.db.com/cr/en/docs/Sustainable_Investing_2012.pdf

Sorensen, P. (2017). The chronic water shortage in Cape Town and survival strategies. International Journal of Environmental Studies, 74(4), 515-527. doi:10.1080/00207233.2017.1335019

USSIF Foundation. (2016). The impact of sustainable and responsible investment. [PDF]. Retrieved from https://www.ussif.org/files/Publications/USSIF_ImpactofSRI_FINAL.pdf.

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