"Socially Responsible Investing (SRI) has for decades remained on the fringe of strategic money management, routinely battling the perception that prioritizing an ethical or social focus requires sacrificing significant returns. The recent freefall of markets and business morality, however, has triggered a greater awareness of correlations between company performance, integrity, and transparency--an interdependence that highlights the nature and high potential of an evolved form of SRI."
Those are the opening lines of a new white paper, "Best Practice in Portfolio Management: Socially Responsible Investing Comes of Age," from Chat Reynders and Pat McVeigh of Reynders McVeigh Capital Management in Boston. The authors believe that the SRI movement "is on the cusp of its next iteration" and cite a number of research studies and other sources including a Wall Street Journal article that noted "more workers are trying to align their personal values and their retirement savings by opting for socially responsible investments in their 401(k) plans...many younger workers and mainstream investors are demanding them as options in their retirement accounts--especially so-called green funds." (Download a copy of the white paper here.)
As that Journal article ("Principled Investing Gains More Fans," Jilian Mincer, Wall Street Journal, May 13, 2009) noted, green topics have never before been as big a part of the American conversation. "It's a terminology shift and there's a lot of pop culture buzz around green right now," observes Steve Schueth, president of First Affirmative Financial Network in Colorado Springs, Colorado.
Schueth is a veteran of more than three decades in financial services and has been with First Affirmative since 1989. His firm manages money for socially conscious investors through a network of about 120 advisors in 29 states, and also owns and produces the annual SRI in the Rockies Conference. We spoke in mid-October as Schueth was getting ready for this year's 20th anniversary conference scheduled to be held in Tucson, October 25-28.
From SRI to ESG
"If you think about it from a historical perspective, green has always been part of the SRI approach," says Schueth. "When I say 'green' in this context, I mean environment and energy. And for that matter, most of the people who are using green as part of their marketing slogans are really focusing on environment and energy. I think that green is becoming a common buzzword and a common galvanizing factor attracting people to the business. Once they're in the door, once they're getting what they need and what they want in terms of environment and energy-related stuff, then we can begin to help them understand that there's more to it than just the environmental factors. What's really interesting is that as those conversations ensue, virtually everybody that's attracted green and that embraces the green terminology, quickly 'gets' the broader conversation. To some degree they start as light green and they become dark green."
As a participant in the SRI movement for the last 20 years, Schueth has witnessed and participated in the evolution of this investment approach and can offer a first-hand view of where it might be heading. He says if you look at the growth of this type of investing "it has been substantial and the SRI space has been gaining market share," he says.
One development that has helped fuel this growth has been a shift in both terminology and the underlying philosophy used by SRI practitioners. "If you look back to the beginnings of this thing, academically you can probably go back 2,000 years to Jewish law, but if you look at it in the U.S., I trace it back to the Methodist and Quaker immigrants, who when they first came here refused to invest in slavery or tobacco or war-related industries," says Schueth in giving a brief history lesson.
By 1990, many investors, says Schueth, "were still avoiding the most egregious polluters, but we also began to look for those companies that were better than their competitors in terms of managing their environmental impact." It was around that time, he says, that "the winds shifted pretty dramatically. Since then, the emphasis has been on positive, or let's call it qualitative, criteria. The avoidance stuff is still there for many clients, but literally it takes five minutes."
The U.N Effect
Another factor that helped bring the SRI movement more into the mainstream was the issuance of U.N. Principles for Responsible Investment in 2006, which addressed environmental, social, and corporate governance (ESG) issues. There were 50 original signatories to the document, including First Affirmative, but according to the PRI Initiatives 2009 annual report, in three years that number has "soared...to 500, representing $18 trillion of assets and 36 countries."
"They coined the ESG terminology so it would appeal to investors around the world," says Schueth of the U.N. document. "They got away from the baggage that the term 'social' had and 'responsible' as well. There was an implication [that if I say] I'm responsible, then that implies that you're irresponsible. There's a bit of baggage around that early terminology that's been replaced with ESG."
One of the other developments that has drawn investors to look at ESG issues in the companies they invest in has been all the talk about sustainability. "Sustainable is not a commentary on where we are today, because nobody believes that we're a sustainable society today," says Schueth, "but where we're going, we'd like to change the way money is used and use it in a positive, transformative way to get us from where we are now ultimately to a truly sustainable society."
When asked to rank the E, S, and G factors, Schueth gave precedence to the environmental issues. "There's a fair amount of academic research now that strongly suggests that in the environmental arena, those companies that have the best environmental management tend to be the best managed companies in each industry sector. So I'd say the E is the most important," he says.
"Second most important is the G because again there's a fair amount of academic research that suggests that those companies that have the best corporate governance are more profitable than their competitors," Schueth continues.
The social factors have to do with issues like how the company treats its employees, or the people in the communities where it operates. "I'm not sure it's less important, but we have less data, less empirical evidence to suggest that managing around the 'S' has a direct link to bottom line profitability, whereas with the E and the G we have a lot of empirical data that suggests that the companies that do good in those areas are more profitable than their competitors."
The Performance Penalty Debunked
At first glance many investors still think that taking ESG factors into consideration is more likely to hurt portfolios than to help. According to Schueth, however, that hasn't been the case. "If we look at the past 12 months, I think we had a little different experience than most of our conventional competitors in the sense that very few of our investors panicked and bailed," he notes. "[They] tend to be bigger-picture thinkers and maybe more long-term oriented. They're into investing for more than just the short-term gains. They want to make money and make a difference at the same time, so they have more patience...Relative to the major conventional benchmarks, we've done quite well."
Schueth also thinks there are some positive lessons that investors of all stripes can learn from the last 18 months. "If I were to pick a few of the positives, the first one is that in every down market cycle it reminds us all that we've got to have diversified portfolios," he says.
"As people become more aware of the big picture and the interconnectedness of all of this stuff, they begin to realize that the money that they spend and the money that they invest has power, and so you can think about it as economic democracy. You vote for companies by spending money to buy their products. Or not. And you vote for companies by putting money into their stocks and bonds. Or not. You have a say. Then, of course, you can vote your proxies, but it's a way for investors to feel more empowered; many more are [doing so] every day."