Disasters like BP’s oil spill last year and Japan’s nuclear crisis have increased the public’s awareness about investing in companies that adhere to certain ethical, environmental and moral standards.
Today, there’s approximately $100 billion in mutual funds that use socially responsible investing (SRI) strategies. Part of this includes ETFs linked to indexes that screen for companies committed to certain religious values, environmental standards, social ethics and corporate governance.
“Sustainable investing” is an offshoot of traditional SRI. The strategy involves selecting companies that aren’t just socially acceptable — but ones that are responsive to employees, customers and communities. According to theory, this should create more loyalty and higher long-term profitability.
Joe Keefe, president and CEO of Pax World Investments, spoke with Research about SRI and sustainable investing and where those fields are heading. Keefe was nominated to the “100 Most Influential People in Business Ethics” in 2008 by Ethisphere, a New York-based international think-tank dedicated to best practices in business ethics.
How do you define socially responsible investing (SRI)?
We don’t really use that terminology anymore at Pax World. We refer to our investment approach as sustainable investing, by which we mean the full integration of environmental, social and governance (ESG) factors into investment analysis and decision making.
How is “sustainable investing” different from SRI?
SRI traditionally defined itself in terms of investing with “values,” often religious in origin, typically through the use of exclusionary screens — shunning alcohol, gambling, tobacco, firearms, usury for the Muslim investor, contraceptives for the Catholic investor, and so on. This exclusionary approach meant that SRI historically became defined in the popular mind more in terms of what it didn’t invest in than what it did invest in.
Sustainable investing, by contrast, is a positive discipline that defines itself in terms of what it does invest in: companies with superior ESG or sustainability performance. Sustainable investing maintains that ESG criteria have financial materiality, and that taking them into account — not only through portfolio construction but also through proxy voting, shareholder engagement and related strategies — is a smarter way to invest over the long term. I don’t consider sustainable investing an alternative investment strategy but rather a better investment strategy.
Many SRI funds got caught holding BP stock just as its Gulf of Mexico oil spill turned out to be an environmental disaster. What changes have occurred in the processes behind SRI funds to avoid these kinds of situations?