Socially responsible investments: Fad, threat or opportunity?
What's driving the increasing interest in socially responsible investing, and is it here to stay?
You’ve probably heard of “socially responsible investing” (SRI) based on “environmental, social or corporate governance” (ESG) criteria. If you’re experienced, you might wonder, “What brought this on?”
Those who remember the anti-Apartheid “South Africa Free” portfolio advocates of the 1980s probably also remember how research showed those portfolios underperformed regular portfolios. They learned “socially responsible” investing wasn’t quite “responsible,” especially if you held a fiduciary position.
Related: How accurate are social and environmental investment ratings?
But the dreams of those social advocates didn’t die at the hands of early studies. If anything, the parade of headlines decrying a litany of ethical breaches by publicly traded companies only emboldened the proponents of socially responsible investing.
Academic research tried to help by reframing the picture. In December of 2007, researchers concluded: “In the results, the regular funds performed better than the SRI funds. However, a problem with these types of tests is that they do not control for differences in fund management. We have therefore developed the method of evaluating SRI funds by decomposing fund performance into firm level performance and fund management performance.”
Lo and behold, this new research strategy produced the desired results. It didn’t necessary show better performance, but it did produce additional metrics beyond investment performance to justify ESG-based investing.
But not all researchers were sold on this new approach. Some academics saw through it. Dr. David Vogel, professor in business ethics at the University of California Berkeley’s Haas School of Business, wrote in the Wall Street Journal, “Studies that have shown a connection between certain aspects of corporate social responsibility and future share prices don’t negate studies that have shown no effect or even a negative impact from such responsibility.”
Yet, we see more assets going into ESG-based investments. Last year, the US SIF Foundation’s report on US Sustainable, Responsible and Impact Investing Trends indicated 26 percent of all investments were placed in SRI funds. This represents a 38 percent increase over two years.
What might explain this trend? If you’re a cynic, you might peg it to a lack of objective consensus on the definition of the specific ESG criteria used by portfolio managers. That would suggest the numbers are meaningless.
This, however, ignores the reality of the growth in “green” advertising—even oil companies tout their environmental friendliness. What drives this advertising? The same thing that always does: demographics.
The US Census projects the millennial generation will soon surpass the baby boomer generation as the largest living generation in America. This drives the marketplace—and the markets.
Chuck Underwood, in his book “America’s Generations,” writes that millennials “prefer to do business with companies that are good corporate citizens.” This applies to buying stocks just as much as petroleum products. It suggests ESG may not be a fad, although it still poses a threat to investment performance, and, worse, it may present an opportunity for marketers.
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