There’s been a growing worldwide awareness at the C-suite level that Corporate Social Responsibility (CSR) is a good business strategy. A growing body of evidence shows that companies that respect the environment, treat their employees and their communities well and behave ethically are better run, more stable and more profitable.
It’s also something that’s come into focus for investors, many of whom have added consideration of ESG factors to their due diligence process. For those unfamiliar with the concept, ESG refers to how companies address environmental, societal and governance factors. The idea is that a company’s behavior can provide some insight into how good an investment is.
ESG Consideration Can Yield Positive Returns
To many observers ESG consciousness is a logical outgrowth of the Socially Responsible Investing (SRI) movement that began in the 1970s mostly as a response to the Vietnam War and the apartheid in South Africa. Conventional wisdom for many years held the position that consideration of one’s personal values in investment decisions (for example refusing to invest in tobacco companies, weapons manufacturers or companies that donate to Planned Parenthood) meant accepting lower returns, but a recent study seems to indicate the opposite.
UBS and Responsible Investor Survey Links ESG with Positive Returns
UBS and Responsible Investor Research conducted a global research survey of 613 asset owners, including pension funds and other institutional investors representing more than $21 trillion in assets, seemed to indicate the opposite. More than three quarters of these investors indicated they already consider ESG factors in their investment selection, with about one-third saying considering ESG has had a positive effect on returns versus the 1% who said it was a negative.
For more than half of the respondents the potential positive effect on returns was a motivation for ESG consideration, although the majority also noted they also considered the potential risks arising from failing to consider these factors.
It’s an area of growing importance for financial advisors, asset managers, and institutional and individual investors. And to help with ESG screening, MSCI has rated 32,000 funds and ETFs based on financially relevant environmental, social and governance practices.
Some Terms You Need to Know
This is also an area with an alphabet soup of acronyms and overlapping meanings that can make it difficult to unravel. Below we’ll explain what some of the nomenclature means and what investors and their advisors need to know.
These three letters originally stood for Socially Responsible Investing and we addressed the origins of the movement in an earlier JConnelly blog. In recent years as thinking and the movement evolved, some practitioners began substituting Sustainable for the “S” word.
This is the practice of investing in companies or funds with the intention of having a measurable beneficial social or environmental impact in addition to providing a financial return.
The United Nations-supported Principles for Responsible Investment (PRI) is an international network of investors working to understand the investment implications of environmental, social and governance (ESG) factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society. At last count there were more than 2,300 signatories to the PRI charter.
Sustainable Investments are in Demand
Sustainable investing is defined by Investopedia as directing “capital to companies that seek to combat climate change, environmental destruction, while promoting corporate responsibility.” Or in other words considering the company’s CSR and ESG. Although often portrayed as a millennial obsession, interest in sustainable investing cuts across demographic groups. A 2018 study conducted by American Century Investments found that more than 40% of baby boomers are attracted by investments promising a positive social impact.
These are all related issues and ones that will come into greater focus for financial advisors because that’s what their clients demand. Getting a grip on the terminology is a good first step in that direction.
Whether it’s due to social-consciousness, moral beliefs, or just another valuable metric to consider, how investors large and small approach what to do with their money is changing. Click the link to read our blog about how investors are doing well by doing good: