Is Socially Responsible Investing here to stay?
Why this topic is important to me?
At the start of the Fall semester of 2018, I went to a certain event hosted by NUImpact: Northeastern’s Impact Investing Fund and Initiative. I had heard about the term impact investing but had no idea what it meant. I went because my friend Shivank Taksali was moderating the event and little did I know this world of sustainable investing would come to mean so much more to me as I progressed through college by joining this organization and eventually leading it.
What is Socially Responsible Investing?
Socially Responsible Investing also commonly known as SRI denoting Sustainable, Responsible and Impact Investing is a term that has gained tremendous popularity recently. The Forum for Sustainable and Responsible Investment (US SIF) defines SRI as:
Sustainable, responsible and impact investing (SRI) is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.
Why it is a big deal?
Though the roots of SRI investing can be traced back 100’s of years to the times when the Methodist Church employed screens to avoid investing in sin stocks related to alcohol, tobacco, and abortion, SRI has recently gained tremendous interest from both money managers and investors as a strategy with pedigree.
The CNBC article written by a New York Times best selling author Thomas M. Kostigen highlights some important facts and trends in this space which shows why SRI might be here to stay.
- SRI represents $12 Trillion in assets under management (AUM), which means 1 out of every 4 dollars invested in America is invested with an SRI lens.
- SRI is growing at a tremendous pace with US SIF report showing a 40% year over year increase in AUM.
- Every firm which is a part of a major financial index like the S&P now issues a sustainability report.
Why is it important? What is driving this popularity?
1. United Nation Sustainable Development Goals
In 2015, 197 members of the United Nations adopted 17 sustainable development goals commonly referred to as SDG’s which they hoped to achieve by 2030 to make the world a better place free of poverty, improving the environment and making the planet a better to place in live in.
On 24th September 2015, the United Nations launched the We the People For the Global Goals campaign featuring many of the biggest stars and most influential people in the world like Jennifer Lopez, Hrithik Roshan, Bill Gates, Malala Yousafzai, Stephen Hawking, John Legend in support of the 17 SDG’s. This video was retweeted 1000’s of times and generated over 1.2 million views on Youtube. The celebrities in this video also have some of the most followed social media handles in the world and shared posts related to the Global Goals.
2. Greta Thunberg and Climate Change
Perhaps one of the most famous climate activists in the world today is 16-year-old Greta Thunberg. She has been the face of the climate change movement and has helped further the cause immensely. The video below is when she appeared on the Daily Show with Trevor Noah one of the most popular Channels on Youtube with over 5.79 million followers.
In the video above Noah speaks to Thunberg’s popularity and how she is inspiring not only her generation about also elder people to be more conscious of the planet, avoid using heavy carbon-emitting transport mechanisms and be more conscious citizens of the world.
The comments section of this video with 26,000+ comments highlighted why so many people believed in this issue as most comments were in support of Thunberg. Some of the comments above show how this issue is not just only prevalent in Europe but is also starting to become one of the biggest growing concerns in the United States and Asia.
3. Money being committed to Sustainable Investing
With more than $30.7 trillion and an incredible rise in assets under management under sustainable investment strategies it is further proof why this field is important and could well be the future of all of investing.
With more people’s acceptance of the the UN SDG, belief that climate change is a growing concern for the world at large, increase in adoration of people like Thunberg and millennial’s wanting to invest in companies with low levels of carbon footprint and high ESG metrics, the world of SRI investing is only going to continue to grow.
Problems in this space:
1. Funds joining the bandwagon for the wrong reasons
Today almost every major fund in the world has an SRI strategy. Some of these big funds include the likes of BlackRock ($6.84 Trillion AUM), Goldman Sachs ($1.52 Trillion AUM) and Vanguard ($5.3 Trillion AUM). All these funds have been known for trying to seek out the last cent of profits from their investment and not being very responsible investors. However, recently these funds have started ESG/SRI strategies of their own. There has been a lot of debate and conjecture on how these funds are doing this from a marketing perspective to generate more profits and do not actually care about the planet.
2. Greenwashing
Greenwashing is defined by Investopedia as:
The process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound. Greenwashing is considered an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly.
Very recently BP one of the largest oil and gas companies in the world took out a very misleading campaign showing how they were making the world a better place by using natural gas. This advertisement was brought to legal attention by ClientEarth as an example of BP taking part in greenwashing. Sophie Marjanac of ClientEarth was on record saying that:
BP is spending millions on an advertising campaign to give the impression that it’s racing to renewables . . . This is a smokescreen!
3. Ambiguous Definitions and Measuring impact
Perhaps, one of the most difficult hurdles for the SRI universe is the ambiguous nature of the term and the difficulty in creating universal metrics that can be used to measure the impact of these investments. Today there are many organizations like the US SIF, GIIN, MSCI, Sustainalytics, etc that provide tools in regards to impact measurement and reporting but there is still a long way to go.
The big question: Does Socially Responsible Investing lead to higher/lower financial returns?
This TED talk by Karina Funk who is the Portfolio Manager and Head of Sustainable Investing of Boston based sustainable investment manager Brown Advisory talks about how sustainable investing can actually generate high social returns along with positive financial returns. She speaks about how at Brown Advisory they measure a business’s success from a financial lens but also see how they would perform from a social, environmental and governmental lens.
She speaks of how certain companies have a distinct EBA’s or environmental business advantages and how these companies can make for great long term investments. She gives many examples to prove her point, my favorite one being between two trucking companies Cummins and Navistar. Navistar did not pay attention to governments and consumer's increasing attention to emission rules and had to pay numerous fines losing out on profits and market share. On the other hand, Cummins was a world leader in meeting emission rules and had amazing growth having 2 to 4 times more market share than its nearest global competitor.
This video was one of the more popular TED videos with close to 110,00 views.
A lot of people engaged and commented on Karina Funk’s TED talk on Youtube. From the nature of comments posted one can see that there is a positive outlook towards her thought process of sustainable investing being able to generate higher financial returns along with measurable social or environmental impact. A lot of people also mentioned how this video has opened their eyes to another realm of investing!
Conclusion
I see this growing popularity of sustainable investing as a very positive trend towards combating many global issues like climate change, gender inequality, income inequality, etc. In years to come I hope for this investment philosophy to become more mainstream with the bigger asset managers who control a majority of the assets invested in the world adopting SRI strategies not only because their clients want it, it will lead to higher financial returns or it makes them look better from a marketing standpoint but because the asset managers actually care about the planet and are conscious of how capital deployed purposefully can make a huge difference.
Lots of work still needs to be done to achieve the UN SDG’s by 2030 and make SRI mainstream. Some of the immediate challenges include:
- Clear definitions in the space
- Boycotting and heavy charge to companies involved in greenwashing
- Robust and universal tools for impact measurement and reporting
The future looks bright for sustainable investing and we all must keep in mind that:
“Every dollar you spend is a vote for how you want the world to be and who you want to control it.”
We must also remember and follow what Greta Thunberg said on the Daily Show with Trevor Noah:
Noah: And the planet is the most important thing for you?
Thunberg: Yeah, I mean, for all of us, I think it should be.
