Why Socially Responsible Investing?
In global sourcing, in both services and products, we frequently talk about efficiencies, cost savings, about the cloud innovations and automation; we talk about return on investment of sourcing projects; but … socially responsible investing? And sourcing? That is a stretch… or is it?
The connection is closer than some of the “efficiency” experts realize, or frankly – are willing to admit. Just consider these perspectives:
- In 2011, Microsoft shareholders adopted a resolution requiring the management of Microsoft to turn its 100,000+ strong supply chain into a socially responsible supply chain. Now the “Global Citizenship” factor at Microsoft accounts for 11% of the total vendor score.
- In 2013, following the tragedy at the Rona Plaza in Bangladesh, investors and consumers of such global brands as Zara, H&M, Carrefour and others, forced changes in labor codes, vendor management and transparency in reporting.
- Nike’s “Manufacturing Index” which monitors, measures and rewards suppliers, allocates 25% value equally to four factors: quality, on-time-delivery, cost and sustainability.
- A 2014 Nielsen global consumer study of 30,000 households from 60 countries reports that on average consumers are paying 10% premium for brands positively associated with social values, with the social premiums as high as 13% in Latin America. This report found that brands increase sales by an average of 5% using social responsibility actions.
These are powerful messages: brand managers listen to 5% sales increase; top management listen to shareholders resolutions and to consumers demands. Isn’t time for sourcing “efficiency experts” to embrace the “social responsibility” message as well?
According to the US SIF Foundation, in 2012, over 11% of the 33.3 trillion in total assets under management tracked by Thomson Reuters Nielsen, were managed according to SRI strategies. This means that one of every nine dollars under professional capital management comes from SRI investors. And these investors actively look for enterprises with specific goals, behaviors, or they force behaviors in firms they invest in, like the shareholders of Microsoft, followed by Dell, Intel, Oracle, and many others.
Investors in the UK and elsewhere as you will find out in this issue of The Source, are teaming up with governments in creating public-private enterprises to move forward the SRI agenda.
What is Socially Responsible Investing (SRI)?
SRI, also referred to as sustainable, values-based investments, socially conscious, “green” or ethical investing, is investment strategy which considers both financial returns and nonfinancial factors so called ESG factors, (environmental, social and governance).
In the classical Milton Friedman system of a free market, investment decisions are based on the principle of assuring the highest return on capital for investors; otherwise referred to as the “greed is good” principle.
In the SRI approach to the market, the decisions are based on optimizing returns beyond the financial dimension, rather then maximizing financial returns at any cost. Other factors such as measurable social and environmental effects are being taken into account in evaluating investment opportunities.
SRI is not a philanthropy, although one may look for SRI roots in seasoned philanthropists. SRI is a broad spectrum of investment strategies. On one end of this spectrum there is the “avoiding harm” principle, such as not investing in cigarettes, alcohol, or fire-arm related enterprises, or negative screening related to oppressive regimes, for example Sudan, or terrorism activities. On the other end of the spectrum, SRI investors actively look for investment targets which support social goals in addition to economic gains (such as investing in enterprises which focus on opportunities for minorities, or channeling capital to poor communities). Amy Domini, a prominent, long-standing member of the socially responsible investing community who founded the Domini Social Equity Fund in 1991 (www.domini.com) has stated that shareholder advocacy and community investing are pillars of socially responsible investing and that doing only negative screening is “not what I would consider adequate”.
The growing body of research documents a strong and positive link between ESG factors and the long-term financial performance of enterprises. As it pays off to be socially responsible, assets managers are looking into ESG factors more frequently to increase returns and better mitigate risks in global enterprises.
SRI – from Side Street to the Main Street
The total of SRI assets in the US is $3.74 trillion, according to the 2012 Report on Sustainable and Responsible Investing Trends in the US, a 22% increase from 2009. Click to read more. It constitutes 11.3% of the total assets under management tracked by Thomson Reuters Neilsen in the US.
Since 1995, SRI assets under professional management have grown over 480%, while general assets in the same time have grown 370%, according to estimates from Thomson Reuters Nielsen. On an average, SRI assets grow annually 1.24% faster then all professionally managed investment assets in the US.The growth of SIF globally is reflected in the UN’s Principles for Responsible Investment program, which as of November 1st, 2014 has more than 1,300 signatory firms from all over the world (http://www.unpri.org) with assets over $30 trillion or approximately 20% of total value of global capital market.
The 2012 SIF report shows a strong trend of SRI strategies being adopted by firms that have not historically identified themselves with SRI.
Here are the few highlights of the report:
- Rise of investment in sectors such as clean technology or community development finance indicates that “investors have an appetite for profitable investment that can address social challenges, including helping to alleviate poverty or reduce carbon emission”.
- Social criteria, such as Sudan-avoidance policies, are the most prominent in asset-weighted terms incorporated in the management of $1.2 trillion across a range of 622 investment vehicles.
- As a response to shareholder engagement by SRI advocates, global corporations increasingly embrace ESG practices and disclosure and incorporate these standards into their operations. In the past year, there has been a sharpened focus on both “integrated reporting” (which links a company’s strategy, governance and financial performance with the ESG context in which it operates) and on the newly created Sustainability Accounting Standards Board (which is establishing standards for integrated reporting and an understanding of relevant and material issues to 35,000 publicly listed companies in the United States). These developments promise a fundamental change in corporate reporting that is also likely to spur more companies to consider and adopt sustainable business practices.
These trends are not just a blip on the radar. With one of every nine dollars in assets under the SRI umbrella, SRI is moving from the side-line to the main-stream of capital markets. That 11.3% of assets in 2012 has a significant power to change market behaviors, such as embracing ESG factors in reporting. Although, as Lisa Woll, the CEO of SIF states: “it is clear we have much more to do in order to further advance the scale of sustainable and responsible investment and to effectively grapple with other challenges to building a robust, equitable and sustainable economy”.
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