In the beginning, the word was "SRI," and it meant "socially responsible investing."
We can trace the beginning back centuries, to biblical times, when Jewish law laid down directives about investing ethically. John Wesley, the founder of Methodism, writing in the mid-1700s, considered the use of money as the second-most important subject of the New Testament. The Methodist Church in the United States has been managing money using what we now call SRI or ESG criteria for more than 200 years.
The modern roots of the responsible investing phenomenon can be traced back to the impassioned political climate of the 1960s and 1970s when investors began avoiding companies based on involvement in weapons manufacturing and environmental pollution. The Vietnam War; the struggle for civil rights; the Bhopal, Chernobyl and Exxon Valdez incidents; to name just a few, all served to raise awareness around money and its impact on the world. People began connecting the dots between business and environmental degradation. And investors began to be more aware of the impact their money has in the world.
In 1994, Nelson Mandela visited the U.S. and thanked investors for helping to dismantle the system of racial apartheid in South Africa. That great victory, along with countless smaller engagements in which investors worked successfully to improve the behavior of companies, began to etch an important idea into our cultural consciousness: that investors can do good and do well at the same time.
Could the race to save our planetary life support systems, cease our dependence on imported oil, and ensure that our quality of life will not only endure but thrive, be our next "space race?" Could the Obama administration's effort to create a New Energy Economy be as powerful and impactful as the rise of the personal computer in the 1980s or the explosion of the World Wide Web in the 1990s? It's possible.
One thing is certain: The ranks of responsible investors-those who want their money working to simultaneously make money and help to transform the world in very positive ways-are growing. And the emphasis is shifting from avoiding companies that are doing harmful things, to seeking out companies that are finding sustainability to be a competitive advantage.
Today, "SRI" means "sustainable and responsible investing."
The New Normal
Already, investment companies and investors around the world, collectively representing more than $20 trillion in assets, have signed on to a set of voluntary aspirational principles promulgated by the United Nations. The result of over 18 months of discussion among some of the world's largest institutional investors, the UN Principles for Responsible Investing (UNPRI) have created a framework for the systematic integration of environmental, social and governance (ESG) issues into investment decision-making. The principles clearly recognizes that ESG issues can affect business profits and portfolio performance.
For many years, even socially aware investors paid little attention to corporate governance. But in the wake of the collapse of some very large and very well-known firms (e.g. Enron, WorldCom, Bear Stearns, Lehman Brothers) has come a new focus on governance. Today, the E, the S and the G are far more integrated into the process as investors analyze the non-financial aspects of companies that affect long-term shareowner value. A large and growing segment of investors, both large and small, believe that integrating ESG criteria into portfolio design can help identify better-managed companies-companies that will do better and be better, for investors and for society at large.
"We are living the continuing evolution of SRI, morphing solidly into an ESG and sustainability focus," says Hank Boerner, chairman of Governance & Accountability Institute. "The E, S, and G are an inseparable unified framework for all investors, not just socially conscious investors." With more shareowners joining in coalitions and campaigns to change corporate behavior, and more shareowner-corporate dialogue resulting in reforms and meaningful change, ESG is indeed the "new normal" of the capital markets.
Megatrend: Climate Change
On the 40th anniversary of Earth Day, April 22, 2010, Deutsche Bank issued a research report entitled, The Green Economy, The Race Is On. The report notes that governments around the world are encouraging the development of a low carbon economy, working to ensure energy security and creating new jobs. It also cites growing business support for tackling change and deploying clean technologies, products and services.
Above it all, though, the global banking and investment giant says it considers climate change to be a megatrend affecting the asset management industry currently and in the future.
"We believe carbon risks and ESG issues to be key material drivers of risk and opportunity," says Bruce Kahn, director and senior investment analyst, Deutsche Asset Management. "Today, more and more investors place value on environmental, social and corporate governance (ESG) issues and recognize that these issues can affect the performance of investment portfolios. At the same time, improvements of ESG performance have become increasingly important for companies-with regard to their own business success."
The U.S. Securities and Exchange Commission (SEC) also recently weighed in on climate change. The new regime at the SEC provided guidance for companies to substantially enhance reporting of both business risks and opportunities from climate change. As we all know, in business, what gets measured gets managed. This extraordinary move by the SEC has the potential to dramatically shift management focus to the long-term impact a corporation may have on our planetary environment, as well as the long-term impact the environment may have on the health and well-being of the bottom line.
The U.S. Military Goes Green
One of the most impressive strengths of the New Energy Economy is its broad appeal. Investing in green companies generally pencils out whether you are motivated by personal values, a desire for above-average investment returns, or concerns about energy security.
Jan Schalkwijk, principal of JPS Global Investments, states "in a recent report released by the Pew Charitable Trusts, the U.S. military was credited for 'leading the way and helping to reenergize America's future.'" This is important. The Department of Defense is responsible for 80% of the government's energy usage (330,000 barrels of oil, 3.8 billion kilowatts of electricity per day). The military is aiming to have 25% of its energy come from renewables by 2025. By 2020, the Navy plans to have 50% of its fuel use come from non-fossil sources.
The military has reclassified energy independence as an asset, and climate change is now classified as a liability. "Similar to how the military spurred Internet and global positioning technologies, it is also stimulating the development of technologies surrounding energy efficiency and alternative fuels," says Schalkwijk. In this year's Quadrennial Defense Review, for the first time in its history, the military has assigned top priority to "developing enterprise-wide climate change and energy strategies."
The Best Way To Predict The Future Is To Create It
Speculation has always been an integral part of our capitalist system, of course, but in recent years we have witnessed such dramatic growth of the global financial casino that the system is now severely out of balance. We can only hope the age characterized by Wall Street investment banks selling securities to the public and profiting from a fall in their value is coming to an end.
Many investors are now consciously embracing strategies that match the full range of their investments with their core values, instead of just a fraction. Many investors are turning away from the traditional "rape, pillage, philanthropy model," which focuses on making money without asking questions about the impact their investments are having on the world. Many investors are questioning some of the core assumptions of our financial system and embracing a more holistic investment approach.
Every investment has two effects: First, our money is working to generate a quantifiable return. Second, our money is capitalizing corporations which are impacting our social culture, environment and climate. A large and growing segment of investors now understand that this second effect is working to create the future in which we, our children, and our grandchildren will be living-whether we are paying attention, or not.
Investors can now make a conscious choice to put their money to work for a dual purpose-to provide for a secure retirement, for example, while working for a better, more socially just and environmentally sustainable future for all. Investors can make a meaningful difference by consciously directing investment capital toward enterprises that contribute to a clean, healthy environment, treat people fairly, embrace equal opportunity, produce safe and useful products, and support efforts to promote world peace.
New Investment Products and Services
The IFC, the World Bank Group member organization dedicated to private sector development in emerging markets, has recently issued a Green Bond. The $200 million raised from this inaugural four-year fixed rate issue will be earmarked for investment in climate friendly projects in developing markets. The plan is to invest IFC funds to build infrastructure while encouraging sustainable investments globally. Projects eligible for Green Bond funding include rehabilitation of power plants and transmission facilities, solar and wind installations, and new technologies that result in significant reductions in greenhouse-gas emissions.
Beyond the Green Bond, there's a new hybrid investment strategy emerging that straddles the space between philanthropy and high-return-driven private equity investing called "Impact Investing." This new breed of social enterprise investing is not for the small or risk-averse investor. With investment minimums around $1 million, impact investing is attracting very high-net-worth investors, families, foundations, and pension funds looking for high impact, and high returns. A sizeable chunk of impact investment capital is finding its way into early stage renewable energy and clean technology companies.
And there will soon be a new marketplace for investors who want to buy or sell impact investments. Mission Markets is a new electronic transactions and communications platform for the social and environmental capital markets. According to Mike Van Patten, CEO and Founder of Mission Markets Inc., the company "will serve as a liaison, linking stakeholders looking to raise capital with investors interested in double and triple bottom line returns."
"We provide a space in which participants and transactions can be monitored, where all available metrics of financial, social and environmental impacts are listed, organized and compared, and where visitors can access news, networking, and social and environmental third party services," says Van Patten. "Mission Markets plans to provide these markets with transparency, liquidity, and scale."
Going Green Has Become Good Business
With the 40th anniversary of Earth Day came hundreds of articles, reports, campaigns and promotions focused on earth-friendly consumer goods. The good folks at Hanes say they can put you in eco-friendly underwear. Frito-Lay is offering Sun Chips in compostable bags. Walmart is pushing its suppliers to reduce greenhouse-gas emissions by 20 million metric tons by 2015, and telling us all about it. Since 2006, sales of "green" goods have jumped 15%, according to research firm Mintel International, and that's during a pretty awful economic environment.
University of California, Berkeley Professor Dara O'Rourke, is the driving force behind Good Guide, "the world's largest and most reliable source of information on the health, environmental, and social impacts of the products in your home." He says that we are now witnessing the birth of a new age-the Age of Radical Transparency. It's an age that will be characterized by companies that embrace sustainability will be perceived as more trustworthy and ultimately more successful than the competition. It's an age where being earth-friendly and wallet-friendly go hand-in-hand. It's an age in which consumers and investors reward companies doing it "right," and are rewarded in return.
In the beginning, the word was "SRI" and it meant socially responsible investing. In today's New Normal, "SRI" means sustainable and responsible investing. In this new age of Radical Transparency, investors will view companies through a responsibility lens.
Steven J. Schueth is president of independent registered investment advisor First Affirmative Financial Network LLC. First Affirmative specializes in socially responsible, sustainable and transformative investing, and supports a nationwide network of investment professionals who work with socially conscious investors. First Affirmative also produces the annual SRI in the Rockies Conference. The 21st annual SRI in the Rockies Conference will be November 18-21, 2010. Mr. Schueth is a former director and spokesperson for the non-profit Social Investment Forum. He can be reached at [email protected].