S & S Decoded: Socially Responsible Investing

At A Glance

Each month we syphon away a fraction of our incomes to prepare for the future in five decades when many of us will be grey, golfing or giggling with grandchildren. Retirement may seem like a distant dream, but our pensions are accumulating as we speak and are being played with by some highly numerical, extremely competent investment individuals that manage pension funds. 

If you’ve overhauled your fast fashion habit, adopted a flexitarian diet, avoided single use plastics like the plague, have you ever considered how your pensions are being invested to reflect your values? If you are actively trying to live a more sustainable lifestyle and avidly opposed to the oil, weapons or mining industries or an active campaigner for renewable energy and preserving natural resources, do you really want your prospective pension savings being invested into a portfolio that injects assets to the very causes you are fighting against? 

Cue, Socially Responsible Investing. 

Investing is no picnic of a profession, at a time of extreme volatility in trade and politics across the global financial landscape, uncertainty is rife for markets and those that play with more than a few pennies. 

The intersection of the lexicon of sustainability with investing has given rise to the phenomena of Socially Responsible Investing (SRI). At its most broad level, SRI can be distinguished as a long-term investment strategy to assess businesses and institutions that combine financial analysis with other criteria including environmental, social and good governance (ESG) factors. The goal of such portfolio strategies is to create a blend of long-term value with both profitable financial and social returns. Prevailing themes of SRI could be refraining from investing in organisations in industries such as oil, weapons, gambling or tobacco. Likewise, in congruence, SRI may actively seek the addition to its portfolio of corporations engaged in sustainability, renewable energy and clean technology. 

In a likened fashion to Margot Robbie and Selena Gomez deconstructing the complexities of the 2008 economic crisis in the Big Short, this instalment of S & S Decoded seeks to unravel the concept of SRI. It will look to the various screening processes, the metrics of ESG analysis and the factors that have fuelled the growth in the trajectory of the market. These factors include positive correlation with superior returns, strengthening risk management and aligning investment strategies with wider stakeholder interests.  

Through the provision of concrete examples, we can trace how the largest institutional investors and pension funds are engaging with SRI strategies to mitigate environmental, social and governance risks to create long term intangible value and financial returns for all stakeholders. 

What’s Occurring – Sensibility Around Sustainability & the Transition from a “Why?” to a “Why Not Movement?” in SRI 

In recent times, there has been a cascading of SRI activity across the financial investing landscape which is due to the redefinition of value creation of enterprises. This has transpired as shareholders and those that reside in the shiny C-Suites of the financial cities prioritise long term returns and risk mitigation. This follows in the wake of the 2008 global financial crisis, corporate governance scandals (Volkswagen/Exxon Mobil) and increased urgency surrounding climate change and social justice. 

The transition from a “Why?” to “Why not mentality?” in sustainable investing has transpired following Larry Fink, CEO of Blackrock, the world’s largest asset management fund proclamations in his 2018 annual letter (treated as gospel) to fellow CEO’s.  He warned that companies who are not accountable for societal changes are a risk for their shareholders which highlighted a key turning point in the attitude towards social responsibility and green strategies. In line with this, Blackrock cited mega trends in investing to include climate change and resource scarcity. This further supports the notion that SRI has been propelled by our increase in consciousness surrounding human rights, governance, gender equality, regulation post 2008 and the risks associated with change. Citizen consciousness is also paired with corporation’s sensibility surrounding sustainability.

In a survey of 297 global companies in 2018, Bain & Co revealed that 81% said sustainability is more important to their business than it was five years prior and poignantly 85% foresee this to becoming increasingly salient over the next five years.

The study also divulged that sustainability has been incorporated into two thirds of the companies’ core mission, a notion that would have been seemingly unheard of at the turn of the millenia. 

History & Current Market Landscape 

So how popular is SRI in reality? Over 25% of assets under management globally are now being invested according to the premise that environmental, social, and governance (ESG) factors can materially affect a company’s performance and market value. At the start of 2016, global sustainable investment assets reached a whopping $22.89 trillion, representing a 25% increase from 2014 and 21.5% in 2012. 

Tracing the history of SRI over the last decade, the practice is still fairly new. The European Investment Bank did not issue its first green bond until 2007 which was a €600 million equity index-linked security, used to fund renewable energy and energy efficiency projects. To contextualise the fast uptake, by 2017 over $155 billion public and green bonds have been issued

SRI is not a homogenous concept, the existence of green investing with green bonds, impact investing and fair-trade investing should all be distinguished. A green bond in particular is one that highlights a company’s green assets and who funds transparency on green projects committed to natural resources. This compares to impact investing which aims to generate specific beneficial social/environmental effects such as not for profit/clean technology enterprises. More options exist including fair-trade investing which is purely focused on projects encouraging transparency for producers in developing nations. 

Last year even saw the inauguration of the first ever blue bond by the Republic of Seychelles and the World Bank which was a US$15 million bond to fund marine protection and sustainable fisheries! (Full story can be found here).

Another point of discussion is that the uptake of SRI is not uniform across the globe as varying levels of disclosure and integration of ESG factors exist across regions. This is demonstrated by the Global Sustainable Investment Alliance (GSIA) who reported that in 2016 European asset managers had the highest proportion of sustainable investments (52.6%), followed by Australia and New Zealand (50.6 %) and Canada (37.8 %).  In other countries such as the US, it is less prevalent (21.6%) as well as Japan (3.4%) and other Asian countries (0.8%). 

Proportion of Global SRI Assets by Region in 2016 
Source – Global Sustainable Investment Review 

Despite these lower figures, the volume of SRI assets growing outside of Europe is increasing at a faster rate. 

This is highlighted by the fact that at the beginning of 2018, $11.6 trillion of all professionally managed assets—one $1 of every $4 invested in the United States—were under ESG investment strategies, a sharp increase from 2010, when the amount was close to just $3 trillion overall. That being said, Europe still very much dominates the SRI market as four in five European institutional investors said sustainable investing was becoming more important, against 74% globally, according to a survey of 650 investors published in June 2018 by Schroders. 

In the UK specifically, assets in ethical funds have trebled over the last decade.

The Financial Times reported that in 2017, UK ethical funds reached a record high as investors injected over £1 billion into active funds which was a 500% increase from 2008.

Additionally, 2018 continued in this direction as the Investment Association, the UK Asset Management Trade Body, reported over £600 million from individual investors were placed into ethical funds in the first half of 2018 vs £180m in 2008. 

European institutions are also pioneering in legislative practices in SRI, demonstrating we have the capacity to lead change on this front. For example, Ireland’s Sovereign Wealth Fund became the first globally to divest from fossil fuels after the country’s lower house of parliament passed a bill that required it to sell its holding.  

The UK Department for Work & Pensions has also driven new significant legislative changes. As of October 2019, trustees who disregard long term financial risks or the uptake of ESG opportunities will have to justify why precisely they have chosen not to actively engage and prove that it hurts their investment returns. Requirements are now set for pension funds to report annually on climate change and sustainability integrated within their investment decision making. The narrative surrounding these changes is positive but in agreement with Merrynn Somserset Webb, Editor-in-Chief of Money Week, stronger definitions of ESG and sustainability criteria should be given to investors and practitioners.

At a global level, institutional support for activities surrounding SRI in its various guises include the UN’s Principles for Responsible Investment, which now represents over half of the world’s institutional assets. 

Guidance through the United Nations Sustainable Development Goals has proved popular in providing investors with a framework. With the main intension, to “end poverty, protect the planet, and ensure prosperity for all.”, it has proved a common means to link each investment strategy to the 17 goals which all run in congruence with various ESG criteria.  If you haven’t heard of them, the SDG’s address long term strategies to mitigate global challenges that include poverty, inequality, climate, environmental degradation, prosperity, and peace and justice. 

An example of this in action is AP2, one of northern Europe’s largest pension funds based in Sweden which publishes how each of its investments contribute to the SDG’s. Not only does this create transparency but benchmarks best practice and acts as a tool to measure impact of SRI. 

Whilst holistic in some respects, the SDG’s are no financial joke, as it is estimated by the Business & Sustainable Development Commission that meeting the UN’s SDG’s by 2030 could generate $12 trillion in business savings and revenue and create 380 million jobs. 

Environmental, Social & Governance Criteria

The most orthodox analysis strategy of SRI uses ESG criteria as an instrument to screen and make investments. What falls into the ambit of ESG criteria? A few examples of its various three tangents and the facets they consider are outlined below. 

Source: Sustainability Accounting Standards Board

Environmental – Climate change (physical and transitional), resource depletion, water stewardship, forest stewardship, waste and pollution, fracking, methane, plastics 

For example, consider climate change, this may impact investment returns because the risk of excessive greenhouse gas emissions may demonstrate a company’s vulnerability to new legislative environmental regulations, or a lack of agility in switching from fossil fuels to renewable energy! This is especially the case as we need to cap global warming at less than 1.5 degrees to mitigate and curb rising sea levels, fresh water scarcity, famine, drought, loss of biodiversity, and preserve habitats.

Social – Human rights, working conditions (slavery/child labour), local and indigenous communities, conflict zones, health and safety, employee relations and workforce diversity (from C suite and down). 

For example, consider a fashion organisation embroiled in scandal regarding their exposure to harsh working conditions in outsourced foreign cheap labour factories. In this instance, it creates risk at the potential loss of intangible assets including brand reputation, brand value and customer backlash that could damage long term profits.

One only has to look at the BP Deepwater Horizon 2010 Oil Spill, caused by a multitude of failings including safety check short cuts. This cost the company a whopping environmental fine of $18.7bn which we can all deduce was not forecasted into their annual budget!

Governance – Executive pay, bribery and corruption, political lobbying and donations, board diversity and structure, tax strategy (inc. avoidance), cyber security 

This criteria is measured and tracked by the fund’s ESG research provider Sustainalytics, a leading independent global provider of ESG and corporate governance research and ratings to investors.

Putting the numbers to this framework, according to McKinsey & Co over 25% of globally managed assets are invested under the premise of ESG factors that can affect the materiality of an organisation’s performance and market value. They also cite that over half of sustainable investments deploy this technique and the rate of uptake is growing at 17% annually. 

In relation to this adoption, the Alternative Investment Management Association (AIMA) reported that ESG is proving increasingly popular amongst hedge funds. This was supported from a study of 80 hedge funds globally that over a tenth ($59 billion) of their combined portfolios ($550 billion) had been committed to ESG strategies. 

Interestingly for businesses that use ESG criteria as a tool they look at multiple layers of SRI.  Firstly the balance of risk management and secondly, value creation generated by following ESG protocol. For example, is their priority to exclude particular companies/sectors/geographic regions? Versus if their predominant goal is value creation and heavily weigh their portfolios with ESG related factors accordingly. 

This is highly dependent on the individual investor and industry, as governance may prove a more salient factor for those in private equity investments where there is a large percentage of ownership shares and less regulation. 

One final note regarding ESG criteria is that for investors it can prove to be far from plain sailing as at times it can lack the rigour and systematisation of routine financial analysis. 

The Practicalities: SRI Screening Processes

The evaluation of ESG criteria leads us nicely into the exact processes of SRI. To engage in SRI and decide on an appropriate portfolio management strategy, there are an abundance of options SRI investment managers may take and here they are briefly summarised: 

  • Negative/Exclusionary screening – An ethics-based approach, looks at the exclusion from a fund or portfolio of certain areas depending on the practices of the company and ESG Criteria, for example not excluding tobacco, nuclear, mining or gambling from their investment portfolio. 
  • Positive/Best in-class screening – Investment in sectors, companies or specific projects that have positive ESG performance in relation to industry peers according to various scores, ratings and thresholds. Actively seeking out companies with desirable characteristics that can support underserved communities (E.G. mortgages/small business credit). This can be used through comparison tools such as the Dow Jones Sustainability World Index, FTSE4Good Index and Carbon Disclosure Project
  • Norms based screening – Compares companies to minimum standards of business practice derived from international norms E.G.) who has breached serious violations of human rights and the International Labour Laws
  • ESG Integration – This looks at the systematic and explicit inclusion by investment managers of environmental/governance factors into financial analysis and varies from firm to firm
  • Sustainability Themed Investing – Drives investment in themes/assets specifically related to sustainability such as clean energy, green technology or sustainable agriculture.  An example could be a fund seeking capital growth by investing at least two thirds of its total assets in the renewable energy sector
  • Impact/Community Investing – Making targeted investment strategies aimed at solving specific social/environmental problems. This is more typical of private markets and includes community investing where capital is directed specifically to traditionally underserved areas and the financing of businesses with a clear social/environmental purpose. 
  • E.G) In 2018, in Atlanta the development of an Environmental Impact Bond of $13 million was granted for green infrastructure projects to aid flood prone neighbourhoods in the city.
  • Corporate Engagement and Shareholder Action – Involves the utilisation of shareholder power to influence corporate behaviour. This could be through direct corporate engagement (between senior managers & board of directors), co-filing shareholder proposals and proxy voting guided by ESG guidelines. 
  • E.G) In 2017 Exxon Mobil shareholders demanded accounting and detailed analysis of the company’s climate change policy risks before investing. You can read about the story here

The patterns of SRI screening strategies have witnessed a shift and transition from purely ethics based negative screening to focus on developing actions in developing long term ESG factors related to market forces. For example, electric vehicle sales and movements in energy prices have prompted those towards investing in renewable energy! 

Performance and success of SRI managers across these strategies depend on whether they are internal or external to the organisation for whom they are investing. If they are external, ESG scorecards and the UN Principles of Responsible Investing criteria will be used. If they are internal company investors, in addition to these assessment tools, their performance will be linked to pay compensation. 

Factors Fuelling SRI

The cultivation of the ever expanding adoption of SRI within the financial arena has been stimulated by three predominant components. 

1. The positive correlation between SRI & superior returns 

According to a 2015 meta study by Friede & Busch, of 2,200 studies taken across the last 40 years examining ESG factors and corporate social performance, 90% found positive/neutral impact on financial returns 

2. SRI strengthens risk management 

The increasing awareness that ESG related risks can impact market value and reputation (e.g. waste/pollution/weather related supply chain disruptions). This also includes brand value, importance of intangible assets, long term risk of climate change and water scarcity. 

This is supported by AIMA who reported that client investing demands for sustainable products has grown by 50% in the last year. Subsequently, this demonstrates how the financial sector is understanding the powerful incentives of including ESG in its portfolios. 

3. Aligning strategies with the priorities of beneficiaries & stakeholders

As demonstrated by the sentiment of Blackrock, shareholders increasingly want certainty of long-term value not only short-term financial returns. 

The movement has been driven by millennials, who are increasingly interested in where their pensions go. The Financial Times reported that in the US 2/3 high-net worth millennials agreed with the statement that

“My investment decisions are a way to express my social, political, or environmental values.”

This compares to only 1/3 of high-net worth baby boomers. 

This trend is also witnessed in the UK. Archbishop Justin Welby believes the battle against climate change will alter the state of the fund sector, commenting

“Millennials want to know that their money is doing more than earning a good return. We are seeing a major shift in attitude among huge numbers of young people from avoiding doing harm to wanting to do good, particularly in the matter of climate change.”.

On balance, it is not all rainbows and butterflies when it comes to SRI. A survey conducted by Legal and General Investment Management (LGIM), one of the UK’s largest funds, found that while most expressed a commitment to support responsible companies through their investments, 33% of respondents indicated that they were not prepared to sacrifice a mere 1% of annual returns in order to do so! 


These are just a handful of examples of the larger funds to give better contextualisation to what is becoming a huge paradigm shift in investing and ESG integration.

  • Norges Bank, which manages Norway’s Government Pension Fund Global (GPFB). They believe that “a good long-term return is considered dependent on sustainable development in economic, environmental, and social terms, as well as well-functioning, legitimate and efficient markets.”
  • Japan’s Government Pension Investment Fund, the largest in the world with over $1.1trillion in assets selected ESG indexes for passive investments in Japanese equities in 2017.
  • ABP, the Dutch Pension Fund, 2nd largest in Europe, in 2015 announced 2 predominant ESG goals. To reduce carbon-emissions in the portfolios footprint by 25% between 2015 and 2020 and to invest €5 billion in renewable energy by 2020.
  • HSBC Future World Fund – Chief Investment Officer for HSBC Bank UK Pension Scheme Mark Thompson, cited that risk management, company engagement and the tilt on climate was “especially important as 60% of our members are under 40 years old and will be invested in the fund for decades to come.”
  • Goldman Sachs ‘Social Impact Bond’ which acts a financial instrument to leverage private investment for high impact social programmes.
  • Impax Environmental Markets, a trust dedicated entirely to alternative energy, water treatment, waste technology.
  • The Workforce Disclosure Initiative, backed by 100+ investors with more than $12tn in assets. The WDI wants companies to provide greater disclosure on workplace practices, including supply chains, employee contracts and whether board members have oversight of the workforce.

Final Thoughts

With some of the world’s leading institutional investors at the forefront of adopting sustainable investing strategies, the future for SRI seems bright. What was seemingly an unorthodox method to manage portfolios has incrementally been drawn into the mainstream practices of many. There appears to be a vested interest in this sector with an increasing number of investors willing to put their heads above the parapet to deliver strategies with purpose in the pursuit of long term environmental and social returns as well as financial ones. It is positive to witness how screening strategies outlined above are more frequently focusing on value creation through positive impact investing in the pursuit of sustainable development as opposed to merely exclusionary and negative screening tactics.

I believe the maturing of SRI through the collaboration of public, private and philanthropic institutions has witnessed growth due to the redefinition of what constitutes “wealth”, instead of merely focussing on financial returns this now includes factors that will make for a sustainable operating space for future generations.

However, despite progress, challenges exist in creating structured and rigid definitions not only of SRI but the various ESG criteria and developing uniform practices. International standardization can prove arduous due to the variance in hyper norms and cultural values dispersed through investors who interpret ‘ethical’ through different lenses.

So, what can we as individuals do?  Many of us will not have the luxury of deciding where our company pensions are allocated however; raising awareness and actively engaging on the topic as crucial stakeholders, can prove critical! We can lobby and demand that institutions offer a wider range of ethical funds to act as an impetus for this investing movement in addressing climate change, societal inequality and technology development that promotes sustainable development.

Moving from ‘Why?’ to ‘Why not?’ in SRI is propelled by the respected business author Peter Drucker, who once said “every single social and global issue of our day is a business opportunity in disguise”!

If you found this Decoded piece interesting, check out “Why It Pay’s To Be Green” but for now I’ll leave you with Larry.  A X


T. Dunfee – Social Investing: Mainstream or Backwater, Journal of Business Ethics,  March 2003, Volume 43, Issue 3, pp 247–252

G.Friede, T. Busch & A.Bassen – ESG and financial performance: aggregated evidence from more than 2000 empirical studies, December 2015, pp.210-233









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