Socially responsible investing, or SRI, is not a new concept. As long as there have been companies to invest in, there have been investors keen to use their investments to promote various causes.
Until recently, however, SRI has mostly been a niche investment area. Among other things, this was because people tended to assume that portfolios built by screening against the environmental, social and corporate governance (ESG) criteria at the heart of SRI would underperform those not subject to SRI’s restrictions.
This has changed. Today, SRI is recognized not only for its potential to positively influence society, but also for its ability to generate sustainable returns comparable to, or even slightly better than, overall market returns.
The new SRI investment case is based on the realization that, as well as being good for the world, ESG criteria provide a blueprint for sound business practice. Companies with high ESG scores should therefore enjoy certain advantages simply because they are likely to be well run, employ sustainable business models and be long-term oriented.
This, so the theory goes, should translate into such important benefits as lower overall costs, more secure and sustainable supply lines, better employee relations, less exposure to accidents and reputational risk, and so on. These advantages in turn will be reflected in these companies’ performance, and can even add to the stock price as investors recognize these companies for their positive efforts.
This makes intuitive sense. As we will discuss in a later article in this series, there is growing – though not yet conclusive – evidence that the theory is borne out in practice.
SRI principles do seem to lead to sustainable, solid returns. That makes them an excellent investment screening mechanism, and a means for investors to do good for the world while still doing well for themselves.