Kermit the Frog, star of Sesame Street (and Miss Piggy’s paramour), once lamented that “It isn’t easy being green.” Today, it’s really easy being green – at least when it comes to investing. But green investing is just one way you can make a difference as an investor: there are a wide range of strategies collectively referred to as socially responsible investing (or “SRI”).
SRI integrates social and environmental principles into the management of investment portfolios. The strategy typically uses various screens and analyses to evaluate potential investments based on three specific factors: environmental, social and corporate governance (or “ESG”). This helps identify a universe of acceptable investments for your portfolio.
Environmental factors
An environmental analysis typically looks at the steps and procedures taken by a company to prevent pollution and waste, reduce greenhouse gas emissions and improve overall environmental practices. SRI is not necessarily “green” investing, which tends to focus on producers of renewable energy products like solar, water and wind.
Social factors
Social analysis looks at factors dealing with the workplace environment including human rights, diversity, health and safety and labour/ management relations. A company’s products are also reviewed with respect to safety and quality. Community involvement and philanthropic activities are also considered.
Corporate governance
Governance reviews seek to determine whether the interests and goals of company management are aligned with shareholders. This is Changing the world – one investment portfolio at a time accomplished by evaluating executive and board compensation schemes, management accountability and shareholder rights.
Industry exclusions
Typically, SRI portfolios exclude firms with significant revenues from the production of tobacco, alcohol, nuclear energy, gambling, weapons and pornography.
Best in sector
SRI portfolios often incorporate the idea of filtering for “best-in-sector” companies, where even a mining or oil and gas company can qualify if, for example, from an ESG perspective it follows best practices, is a leader in that industry, or responds to challenges better than its peers.
Agent for change
Some SRI proponents may push for change by engaging companies through discussions with management, filing shareholder resolutions and using shareholder votes in accordance with SRI principles.
Do good, while doing well
While there’s no clear link between SRI disciplines and investment performance, the chart above shows that the SRI approach has, since 2007, led to modestly better results on a global basis. Perhaps more important is the fact that SRI did not lead to underperformance, despite the more limited range of investment possibilities.
To learn more about responsible investing, join us online for an in-depth discussion of responsible investing, including Environmental, Social, Governance (ESG) and Impact Investing with:
Kent McClanahan, CFA
Vice President - Global Manager Research
Senior Responsible Investing Analyst
Feel free to reach out if you have any questions.
Connor Ryan
905-895-4102