Socially Responsible Investment Grows Rapidly

by Gary Gardner

Socially responsible investment (SRI)—investment and advocacy designed to help promote sustainable economic activity—continues to grow rapidly in industrial countries and is beginning to emerge in a few developing nations as well. Because SRI is defined differently in different countries, a global figure for total SRI has not been established. But in every market in which this new breed of investment has a foothold, it is on the rise.

SRI volume is greatest in the United States, with a total value of $2.29 trillion in 2005.1 (See Table 1.) Europe’s commitment to socially responsible investing is rising rapidly, and in 2005 reached $1.22 trillion.2 Canada, Australia, New Zealand, and Japan have smaller but growing SRI sectors.3 And SRI funds have been established recently in Malaysia and Singapore.4

The share of total managed investments going into socially responsible economic activity is still small to modest, ranging from less than 1 percent in Japan to more than 9 percent in the United States.5 But SRI growth has been rapid over the past decade, although national monitoring bodies measure different attributes of SRI, making growth rates difficult to compare. In Australia, SRI funds under management grew 36-fold between 2000 and 2006.6 In the United States, they grew more than threefold between 1995 and 2005.7 Canadian SRI grew nearly eightfold between 2004 and 2006.8 And in Europe, SRI grew by some 36 percent between 2003 and 2006.9

SRI primarily involves applying ethical screens to personal and institutional investments to ensure that funds are directed toward sustainable activities and away from unsustainable ones. Funds can use “negative” screens, meaning that they prohibit investment in companies or funds involved in specific activities such as tobacco production or nuclear power. “Positive” screens, a more recent SRI tool, encourage investments in companies that generate economic activity consistent with sustainability, such as solar power or microfinance. In Japan, where SRI is relatively new, almost all screens used are positive ones.10

In the United States and Europe, SRI activity also includes efforts to use shareholder power to steer corporate behavior in ethical directions. The number of resolutions on social and environmental issues introduced at annual shareholder meetings in the United States grew 16 percent between 2003 and 2005.11 The number with enough support to reach a vote increased by 22 percent in the same period.12 In 2006, for example, some Wal-Mart shareholders put forth a resolution asking the company to produce an annual sustainability report.13 And Anadarko Petroleum shareholders asked that company to assess the impact of its business on climate change.14

Shareholder resolutions need not pass—and often need not even come to a vote—to steer a corporation’s practices in a new direction. The adverse publicity of a pointed shareholder resolution may be enough to pressure corporate executives to change course. The Executive Director of the Interfaith Center on Corporate Responsibility (ICCR) in New York notes that the stream of CEOs into her office has increased over three decades as ICCR has become more effective at gaining support for shareholder resolutions. She now spends roughly half of her time meeting with corporate executives who are responding to proposed resolutions.15

The smallest dimension of SRI is community investing, which involves steering investment capital to areas that traditionally lack it, such as inner cities in wealthy countries or microfi- nance cooperatives in developing countries. Community investing moves beyond screened investments, which aim to green existing economic activity, and focuses instead on generating entirely new nodes of sustainable economic activity. In the United States, community investing has grown from $4 billion in 1995 to $20 billion in 2005.16

SRI performance has often been competitive with standard investments. A 2005 study of the Domini 400 Index—a measure of the performance of SRI portfolios—found that returns over the long run were very competitive with those of the S&P 500.17 Meanwhile, the top 10 ecofund performers globally in 2006, with investments in eight countries, posted average returns of 39 percent.18

Indeed, SRI—once synonymous with inferior returns—is becoming a respectable investment source as evidence mounts that sustainable business practices often help a company’s bottom line (and, in turn, make the firm an attractive target for green investments). Research indicates that sustainable practices increase a firm’s value in concrete ways: by cutting waste and therefore costs, helping to recruit and retain the best staff, strengthening revenues, and reducing liability risk associated with unsustainable practices (such as emitting carbon, a major contributor to climate change).19 These advantages may help explain why the portfolio value of the “Global 100” most sustainable companies, unveiled each year at the World Economic Forum in Davos, Switzerland, outperformed the MSCI World index (a common benchmark) by 80 percent over the period January 2000 to December 2005.20

Pension funds are increasingly important in raising SRI investment totals. In the United Kingdom in 2000, for example, occupational pension schemes were required to reveal whether they took social, environmental, or ethical factors into account when deciding what stocks to invest in.21 Similar regulations have since been passed in Australia, Sweden, and Germany.22 Similarly, the California Public Employees Retirement System, one of the largest pension funds in the United States, committed in 2001 to sell its tobacco stocks, to screen investments to ensure they meet human rights, labor, and environmental standards, and to dedicate some 2 percent of its assets to community investment.23 And the nearly eightfold growth in SRI value in Canada between 2004 and 2006 was largely due to a shift of publicsector pension funds toward SRI investments.24 Pension funds are often the largest group of institutional shareholders and carry considerable weight in determining how companies act.25

Retail investment firms are increasingly helping clients make socially responsible investments. Beyond offering screened investment options, some retailers are promoting particular segments of SRI, such as microfinance, which provides very small loans to impoverished, entrepreneurially minded individuals, primarily in developing countries. In 2006, TIAA-CREF— a U.S. firm with $380 billion in assets under management—established a $100-million fund for microcredit that offers investors a way to direct their investments to capital-short sectors.26

SRI is also spurred by growing recognition at the highest levels internationally. In 2006 the United Nations launched the Principles of Responsible Investment, which commits signatories to apply environmental, social, and governance norms to their investment practices.27 The launch featured more than 70 institutional investors as charter signatories, representing more than $4.5 trillion in assets. 28 The principles grew out of work promoting SRI in other U.N. programs, including the U.N. Environment Programme Finance Initiative and the U.N. Global Compact.29 In addition, the International Interfaith Investment Group launched in 2005 is a global effort to steer institutional religious wealth toward sustainable projects.30 The group includes 16 organizations from four world faiths as members.31

Includes the following charts and graphs
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Notes
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