Socially responsible investing has its share of critics, although they are dwindling in number. Socially responsible investing has both its practical and altruistic sides, which we think helps explain why it's gaining proponents among investors and institutions worldwide, including us.
We at Turner Investments think the merits of socially responsible investing far outweigh any drawbacks. We believe in socially responsible investing for three reasons: we consider it the right thing to do, it adds value to our security analysis, and it can help generate investment outperformance. We think socially responsible investing demonstrates that virtue can be not only its own reward but financially rewarding as well.
Through the years, verbal darts have been thrown at socially responsible investing, an investment approach that takes into account what are called environmental, social, and governance issues, or ESG issues. Here's one dart that happened to be hurled by a skeptical blogger on the MarketWatch Web site: "Socially responsible investing is-how can I put this diplomatically?-a counterproductive investment gimmick that tends to blow with the shallowest public winds of the moment."
That kind of dismissive rhetoric used to be common. Advocates of socially responsible investing were once stereotyped as "muddle-headed leftists or hopeless do-gooders," notes Barron's. But socially responsible investing today is less frequently perceived as some rarefied form of business utopianism; it's going pragmatic and mainstream.
To date, socially responsible investing has been adopted by more than 700 money managers worldwide (including us), which hold more than $18 trillion in investment assets. And it's endorsed by such ideologically diverse bedfellows as General Electric, the United Nations, the Australian Government Employees Superannuation Trust, BNP Paribas, PricewaterhouseCoopers, the Women's Network for a Sustainable Future, HESTA Super Fund, and the Private Equity Council.
700 Signatories And Counting
As one of the 700-plus investment firms that have made a commitment to socially responsible investing, we are signatories of the United Nations Principles for Responsible Investment that address ESG issues. As such, we have pledged to incorporate ESG considerations into our investment decision-making.
That means we as shareholders seek to influence for the better the companies we invest in that may be guilty of violating human rights, damaging the environment, committing gross corruption, or failing to behave according to basic ethical norms of business. Also, that means we encourage companies to provide greater disclosure about their own commitment to ESG practices. For instance, we want companies to communicate results in controlling their carbon emissions, establishing diversity in their management ranks, refraining from employing child labor, and enhancing the "sustainability" of their operations (which we define as their ability to meet present needs without compromising the ability of future generations to meet their own needs).
Some critics assert that socially responsible investing tends to lead to chronic investment underperformance because it restricts the universe of investing choices. They consider socially responsible investing contrary to the primary fiduciary responsibility of investment managers to produce the best results possible for clients. Investment managers, they argue, have no business taking ESG issues into account in running stock portfolios.
ESG Affects Profits
We respectfully disagree with that view. We think the stronger counterargument is that ESG issues can have a huge impact on a company's profitability and share price, so that to ignore those issues is itself a dereliction of fiduciary responsibility.
Happily, our view seems the one that's prevailing around the world. Australia, Germany, Norway, the United Kingdom, and the United States, among others, have been ardent champions of socially responsible investing. For instance, the California Public Employees' Retirement System, known as CalPERS, has been one of the most proactive-and effective-organizations in seeking to inspire change and enhance shareholder value at companies. According to a study by Wilshire Associates, a consulting firm, the companies that CalPERS has targeted for reforms in corporate governance (involving matters such as corporate policies, shareholder rights, and executive pay) trailed the S&P 500 Index in the five years prior to CalPERS' activism, but beat the benchmark in the five years after it. That suggests to us that socially responsible investing is more than some mutant strain of Chronic Idealism Syndrome; it can be a workable means of capturing extra return in stock investing.