Socially responsible investing: Moral capitalism
Social good is seldom associated with stock markets, and even less so when global heavyweights like Nike, Olympus and BP find themselves mired in controversy. However, while many equity analysts are still likely to argue that investing is all about securing maximum returns, it is hard to ignore the closer scrutiny placed on corporate ethics since the financial crisis.
While corporate governance issues are appearing more frequently across news outlets in recent years, the same can be said of environmental issues and the growing strain on natural resources caused by the rapid growth of the world’s population. Clearly no longer an issue exclusively for ‘hippies’ or ‘alternative’ folks, Wall Street’s previous dismissal of sustainable and responsible investing as a feel-good fad has undergone a reversal.
Data from the Ethical Investment Research Service (Eiris) confirms that assets under management within the socially responsible investment (SRI) arena have grown from £4bn to £11bn in the past 10 years. Furthermore, in 2011 an Eiris survey found that
82 per cent of UK consumers want financial product providers to pay more attention to environmental, social and governance (ESG) risks as part of ensuring a decent financial return.
But despite this growing demand and evidence of significant inflows, there is still a great deal of confusion on the true definition of SRI. While some will have a stricter approach than others, SRI generally refers to the integration of ESG considerations, listed in Box 1, and involves the process of screening – the application of positive or negative criteria – before deciding where to invest.
Internal conflict
Determining what is ‘socially responsible’ is down to personal opinion, which is why the sector on a whole can vary considerably from fund to fund. Some providers, for example, now associate more with engagement – the use of shareholder rights to influence companies – while others still prefer to simply screen out ‘unethical’ companies.
This notion of avoiding certain industries has attracted plenty of negative publicity, with many arguing that over-selective investors are just further compromising returns in what is becoming a volatile and hard to beat market. Because of the negative stigma attached to SRI and its screening process, some socially responsible providers have completely shunned the tag.
Gerrit Heyns, a partner at Osmosis Investment who runs the Global Environmental Enterprise fund alongside L&G, says that, generally, investment acronyms misleadingly attempt to provide some structure. In the case of SRI, Mr Heyns is eager to distance his firm from the suggestion of placing moral value over financial returns.
