Modern Sustainable Responsible Impact Investing vs. Traditional Socially Responsible Investing
A review of these two different “SRI” approaches
Sustainable impact investing is not necessarily something new to Wall Street but rather actually just the next step in the evolution of socially responsible investing (SRI) strategies. For those who may not be aware, socially responsible investing is an investment style that uses both positive and negative screens to include or exclude companies in a portfolio based on social, moral, ethical and religious criteria. For the majority of the existing SRI strategies in the marketplace, this equates to an exclusionary process that excludes companies who may have a certain percentage of their revenue derived from areas such as weapons, tobacco, alcohol or gambling. Other strategies may look to exclude the stocks of companies in certain industries, or sub-industries, which are associated with these socially taboo areas. One of the oldest, and most recognized SRI indexes, is the Domini 400 Index. This index, which is now the MSCI KLD 400 Social Index, was launched back in 1990 and currently uses the MSCI USA IMI ESG Index as its selection universe. According to its stated index methodology, companies involved in the following activities are excluded from the index:
- Military Weapons
- Civilian Firearms
- Nuclear Power
- Adult Entertainment
- Genetically Modified Organisms
Some critiques of traditional socially responsible investing strategies are that they often do not consider the investment merits of a given company’s stock and that the excluded companies that were perhaps “sinful” in certain areas were providing positive, sustainable characteristics in other areas and yet are excluded anyway. Limiting the sectors or industries that are included in a given investment portfolio can also hinder potential diversification and/or growth of capital opportunities.
Sustainable, responsible and impact investing, on the other hand, offers what I believe to be a more dynamic approach to investing in this rapidly growing area. This type of investing involves more of a positive, proactive and comprehensive review of a company to provide for a more robust picture of the company’s operations and social, as well as economic, impact. Factors considered for this type of investing generally fall into the categories of environmental, social and governance (ESG).
Picture Source: www.dealmarketblog.com
Investopedia defines the application of these factors as, a set of standards for a company’s operations that socially conscious investors use to screen investments.
- Environmental criteria looks at how a company performs as a steward of the natural environment
- Social criteria examines how a company manages relationships with its employees, suppliers, customers and the communities where they operate
- Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights
Through impact investing, investors will look to invest in businesses or investment strategies that combine both social and financial returns. Investment funds (i.e. mutual funds, variable annuity funds, closed-end funds, exchange-traded funds, alternative investment funds and other pooled products) incorporating ESG factors have grown considerably since 1995. The number of funds incorporating ESG factors has grown by nearly 1,600% from just 55 in 1995 to 925 in 2014. Additionally, total assets invested in funds that incorporate ESG factors have also increased by nearly 36,000% from $12 billion in 1995 to $4,306 billion in 2014.
Investment Funds Incorporating ESG Factors (1995 – 2014)
Overall, a growing number of investors are considering sustainable, impact, environmental and socially responsible factors in the asset allocation decision making process. To this end, the total U.S.-domiciled assets under management using Sustainable, Responsible and Impact (the “new SRI”) strategies expanded from $3.74 trillion at the start of 2012 to $6.57 trillion at the start of 2014 according to the U.S. Sustainable, Responsible and Impact Investing Trends 2014 report.
Total Assets using “new SRI” Strategies
Some Wall Street investment firms are promoting the benefits that sustainable impact investing has in their investment platforms. For example, according to Morgan Stanley’s website, they will, “…expand the Investing with Impact Platform through new products and innovative thematic portfolios to meet rapidly rising client demand for new opportunities. The Firm has set a five-year goal of $10 billion in total client assets through the Investing with Impact Platform.” As another example, Goldman Sachs Asset Management stated in a January 2013 article entitled, “GSAM Statement on Responsible and Sustainable Investing” that, “We believe responsible and sustainable investing extends beyond the evaluation of quantitative factors and traditional fundamental analysis. Where material, it should include the analysis of an entity’s impact on its stakeholders, the environment and society. We recognize that these environmental, social, and governance (ESG) factors can affect investment performance, expose potential investment risks, and provide an indication of management excellence and leadership.”
The rising trend toward the “new SRI” is not limited to the United States. Assets under management incorporating sustainability investment strategies reached $21.1 trillion globally as of the beginning of 2014, up 61% from the onset of 2012, said the “Global Sustainable Investment Review 2014,” released recently by the Global Sustainable Investment Alliance. As a result of the growth, assets that use a sustainability approach accounted for 30.2% of all assets under management across the regions covered by the review, up from 21.5%. Interestingly, negative screening (i.e. “old SRI”) is the largest strategy in Europe, while ESG integration (i.e. “new SRI”) now dominates in the United States, Australia/New Zealand and Asia in asset-weighted terms according to the report.
Additionally, according to a Merrill Lynch article entitled, “Socially responsible investing: Aligning your principles with your investing goals”, managers representing 15% of the world’s investable assets committed to socially responsible investing in 2013 and managers/strategies representing more than $45 trillion in assets committed to investing through the United Nations Principles for Responsible Investment (UNPRI) in 2014.
The UNPRI is at the core of the global sustainable and responsible investment movement. The Principles for Responsible Investment were developed by an international group of institutional investors reflecting the increasing relevance of environmental, social and corporate governance issues to investment practices. The process was convened by the United Nations Secretary-General. These are the six stated principles:
- Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
- Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
- Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
- Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
- Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
- Principle 6: We will each report on our activities and progress towards implementing the Principles.
Companies are invited to apply to become a signatory of the UNPRI if they can demonstrate their commitment to responsible investment and desire to be at the heart of the global community seeking to build a more sustainable, overall financial system. There are three categories of signatories to the UNPRI which include asset owners (288), investment managers (884) and professional service partners (187).
For more information on the sustainable investment philosophy, and specifics on the particular sustainable impact investing UIT solution offered at SmartTrust®, please contact SmartTrust® at (888) 505-2872 or firstname.lastname@example.org and request a copy of the whitepaper entitled, “SUSTAINABLE IMPACT INVESTING – The next step in the evolution of Socially Responsible Investing (SRI).”
Disclosure: Hennion & Walsh is the sponsor of SmartTrust® Unit Investment Trusts (UITs). For more information on SmartTrust® UITs, please visit www.smarttrustuit.com. The overview above is for informational purposes and is not an offer to sell or a solicitation of an offer to buy any SmartTrust® UITs. Investors should consider the Trust’s investment objective, risks, charges and expenses carefully before investing. The prospectus contains this and other information relevant to an investment in the Trust and investors should read the prospectus carefully before they invest. Please contact SmartTrust® at (888) 505-2872 or visit www.smarttrustuit.com to obtain a free prospectus.