In June 2012, CEOs of companies from around the globe met in Rio de Janeiro, Brazil, and developed more than 150 voluntary commitments to “sustainability” in areas such as energy efficiency, safe drinking water, waste reduction, reforestation, and carbon emissions.¹
These commitments reflect a growing belief among business leaders that sustainable practices are not only good for the environment but also may be good for the bottom line. In a 2010 report by the United Nations Global Compact, 93% of CEOs believed that sustainability would be important to their future business success.²
Sustainable and Responsible Investing
Investors are helping to drive the sustain-ability movement through an increased interest in companies that reflect their personal values in terms of products, services, and business practices (see chart). About one out of nine professionally managed investment dollars in the United States is invested according to sustainable and responsible investing criteria.³ Socially responsible investments (SRIs) represent 21.8% of global investment dollars.4
SRIs typically utilize one or more of the following approaches.
Investment screening incorporates environmental, social, and corporate governance (ESG) factors to analyze and construct investment portfolios. Investors might screen out or include companies in a portfolio based on ESG issues such as employee relations, environmental practices, product safety and utility, and respect for human rights. For example, many SRIs currently exclude investments in the Sudan and Iran.5 An SRI might include companies that produce “green energy” products and might screen out companies that produce tobacco or alcohol.
Shareholder advocacy uses voting power and other influence to encourage corporate management to follow practices that might improve the company’s ESG efforts and impact. Advocacy has increased in recent years, driven not only by growing interest but also by more accessible shareholder information and regulatory changes that require increased transparency.
Community investing channels investment dollars to benefit individuals or organizations that have been underserved by mainstream financial institutions. This is the least common type of SRI in terms of total funding, but it is growing quickly.6
Consider the Risks
Some studies indicate that, in general, SRIs perform similarly to non-SRI investments.7 Of course, like all investments, SRIs entail risk and could lose money, and they may underperform similar investments not constrained by social policies.
Specific SRIs may also entail additional risk related to market readiness. Companies that develop environmentally friendly products and services might offer long-term growth potential but could be years away from establishing those products and services in a competitive market.
Focusing on SRIs may limit the total universe of available investments and make it more challenging to establish and maintain your desired asset allocation and diversification. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee against investment loss.
SRIs might have a place in your portfolio if they meet your overall investment objectives. However, there is no guarantee that an SRI will achieve its investment objectives, and different companies may use different definitions of socially responsible investing. As with all investments, you should take the time to learn about a potential SRI before making a commitment to purchase.
1) AFP, June 18, 2012
2) A New Era of Sustainability: UN Global Compact-Accenture CEO Study 2010
3, 5–7) The Forum for Sustainable and Responsible Investment, 2012
4) Global Sustainable Investment Alliance, 2013
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