There was a time when people thought investments and social change didn’t go hand in hand. You were either into making money or you wanted to bring about positive impact on the world. But in the last few decades, that sentiment has been falling away.
This idea is not new but in recent years has gained serious traction. The concept is known by many names — Socially Responsible Investing or Sustainable, Responsible, Impact (SRI), Environmental, Social, Governance (ESG) — but the core idea of investing your conscience has remained and the ability to do so has bloomed.
The history of SRI can be traced back centuries when various religious groups used the concept to develop investments that aligned with their core values. Some groups mandated that their investments did not violate their religious beliefs while others refused to invest in businesses that dealt with alcohol, tobacco, firearms, and such. In doing so, the concept of “excluding” companies that produce, distribute, and sell products that are deemed harmful was conceived.
Fast forward to the 1970s: Activism and protests were growing in the U.S. due to its involvement in the Vietnam War. Particularly worrying was the use of chemical weapons. As a result, investors organized and drafted letters to corporate leaders objecting to the use of napalm and Agent Orange. These anti-war actions further advanced the concept of exclusion in investing. At the time, the trend was better known as socially responsible investing.
In the 1980s, the anti-apartheid movement called for divestment in South Africa. Investor activism pressured corporate leaders into action and ultimately reached the U.S. government where foreign policy was influenced. At the end of the decade, the Exxon Valdez oil spill in Prince William Sound, Alaska, put pressure on companies seen as exploiting fossil fuels.
Around the world in the 1990s, concerns of a warming planet swelled. The Kyoto Protocol, a multinational agreement between 192 parties (the United States dropped out in 2001), was signed with the goal of reducing carbon emissions. Sustainable investing options continue to expand, albeit at a modest pace and exclusionary screening remained the primary strategy. But a new technique began to emerge, that of inclusionary screening, the process of seeking out companies that are deemed beneficial to the environment.
In the 2000s, under the influence of the United Nations led by Secretary-General Kofi Annan, burgeoning sustainable investing options bloomed across the world. This was due to the fact that the UN was encouraging integration of environmental, social, and corporate governance considerations into financial markets. Later in that decade, these initiatives were termed Environmental, Social, Governance (ESG) investing, an umbrella term for investments that seek positive returns and long-term impact on society, environment, and the performance of the business. Evidence mounts that integrating this holistic view offers investors long-standing advantages.
In the 2010s, as issues such as climate change, carbon emission, labor practices, and corporate governance gained traction around the world, and consumers began to base purchasing decisions on sustainability, the investment world took notice. Public companies observed consumer expectations of environmental and social stewardship, and in turn, they began taking into consideration the wellbeing of stakeholders, not just shareholders. Many companies worked to ensure (and market) that they operate in a transparent and ethical manner.
In August 2019, the CEO-led association Business Roundtable redefined the purpose of a corporation to promote “An Economy That Serves All Americans.”
“The American dream is alive, but fraying,” said chairman Jamie Dimon, CEO of J.P. Morgan Chase, in a statement. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term.” Starting in the late ’70s, the Business Roundtable has periodically released a document titled Principles of Corporate Governance. Since 1997, each issue prioritized stockholder interests over all else. Dimon’s 2019 remarks reflected a break from this norm, refocusing on stakeholders beyond simply shareholders.
Some years ago, socially responsible investing received a bad reputation as not being able to offer competitive investment returns when compared with traditional investments. There’s no question there was a period of time when this was true, primarily due to the exclusionary screenings basis. The companies excluded from investment portfolios tended to be considered “sin” stocks, the shares of companies that dealt in alcohol, gambling, tobacco, firearm, and similar industries. Right, wrong, or indifferent, those companies tended to perform well, and excluding them naturally led to a drag in performance.
Today, exclusionary screening may still be used; however, more refined tools allow investors to be inclusionary, seeking out companies that make a positive mark on the world. For example, better screening methods provide the ability to evaluate a company’s record on a number of important issues, such as greenhouse gas emissions, water pollution, corporate boardroom diversity, workforce diversity, corporate governance and culture, executive compensation and a host of other impact factors. “Green investors” specifically look for businesses that have an eco-friendly product or service, such as renewable energy and alternative fuels.
The most direct strategy is shareholder activism — becoming a shareholder to influence a company’s business practices. However, for the majority, this technique is simply not practical. Perhaps the most accessible strategy for most is to use ESG Integration, by which sustainable investing criteria drive the construction of an investment portfolio.
2020 has been unlike any year in our lives. We are faced with a once-in-a-century pandemic, social unrest, income inequality, and a historic wildfire season in the Western United States. As we look for ways to help heal the world, one can’t help but consider how the concept of sustainable investing might help drive positive change.
~ This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Please consult your financial advisor prior to making financial decisions. John Manocchio is a financial advisor offering securities and investment products and services through Waddell & Reed Inc. member FINRA/SIPC. Miller/Manocchio Team is a separate entity from WRI. WRI is not affiliated with any other persons or organizations referenced. John can be reached at (530) 412-3757.