Last month brought one of the most seismic shifts in capitalism’s history when nearly 200 CEOs of America’s largest companies, collectively known as the “Business Roundtable,” agreed to redefine the central purpose of the corporation. No longer, the Business Roundtable declared, will the focus of the corporation be to maximize shareholder profits at any expense. Rather, the new central purpose of the corporation is to focus on delivering value to multiple social stakeholders — including employees, consumers and communities.
What does this all mean, and why should advisors care? Because this new wave of social responsibility has come to Wall Street, not by way of regulators or politicians, but from the most unlikely source: our clients, the millions of everyday investors who, through the allocation of their retirement savings, are now applying bone-crushing pressure to the world’s largest and most powerful multinationals to clean up their act.
This trend is fueled by three developments. First, today’s investors are more educated and better informed than at any time in history, which has led to a growing awareness of both the plethora and seriousness of the issues confronting society. In the age of social media, companies who commit environmental atrocities or engage in abusive labor practices can be mercilessly punished by consumers (via boycotts that hurt revenue) and investors (who drive up the cost of capital for offenders).
Second, there is growing consensus that government action by itself a necessary but in insufficient solution to some of society’s most pressing challenges, such as climate change and social inequality.
Finally, seismic demographic and economic shifts have brought more women and millennials, who generally tend to be more socially conscious investors, into global capital markets.
SRI, ESG & Impact: What’s in a Name?
Don’t be confused. The key word is “investing”; this is not about philanthropy. Regardless of the label, all of these approaches are ultimately about seeking a positive financial return while bringing about positive change in some way.
Socially Responsible Investing (SRI)
Socially responsible investing typically refers to constructing portfolios using “negative screens” to exclude firms or sectors involved in activities investors deem to be unacceptable or controversial. For example, this might include building a portfolio that excludes firms that sell weapons or tobacco or firms with egregious environmental or human-rights records. Investors utilizing an SRI approach to portfolio construction essentially “punish” bad actors by denying them use of their capital.
Environmental, Social & Governance Investing (ESG)