Social Responsible Investing for a Better (investment) World

Social Responsible Investing (SRI), also known as sustainable investing or ethical investing has origins dating back to as far as the early18th century and was motivated mostly through religious reasons. The modern SRI movement, as we know it today, started in the 1960s. The movement spawned out of an increased awareness of social and environmental issues. It eventually became a marketing gimmick for many multinational corporations attempting improve their image to the outside world, regardless of their actual policies.

Not until the 1990’s did a serious social/environmental paragraph in business plans and prospectuses became apparent, and was the positive effect on business performance acknowledged. During this time, socially responsible mutual funds, or social funds were starting to emerge. In the years since the number of social funds has increased significantly, and not for no reason, as proven by the Domini 400, a benchmark that measures the impact of social screening on financial performance. Since its start in 1990 the index has continuously outperformed the S&P 500. The companies in this basket just seem to adapt to volatile market conditions better than ordinary companies.

The way typical corporations develop their business can expose them to risks that may not be detectable using conventional techniques of financial analysis. Extra-financial factors - such as environmental, social or governance performance - are those which are likely to have at least a long-term effect on business results, but which lie outside the customary span of variables that get integrated into investment decisions, irrespective of whether they are part of the research process. Such an enhanced analysis or more holistic investment approach improves the longer-term performance of a company’s assets on behalf of its shareholders by helping to generate increased out-performance, but also by improving overall market returns by ensuring more efficient allocation of capital and eventually more profit.

Though, on a more critical note, more extensive studies are needed to explore the causal mechanisms linking SRI to profitability and to determine whether or not those relationships individually hold up consistently over time. The source of the connection between SRI and profitability has rarely been systematically investigated. It will also be important to investigate the timing in the relationship, since it would be valuable to investigate and to ascertain how long it takes for the impact of SRI on financial performance to be revealed.

Nonetheless, the current financial crisis has put a spotlight on some of the worst practices on Wall Street, many of which socially conscious investors have worked to remedy over the years. Therefore a more socially responsible approach to investing can—and should—play a role in helping to transform the investment sector, into a more conscious world that is less exposed to risks undetected by its traditional habit of shortsighted analysis.