The Evolution of Socially Responsible Investing
The growth of socially responsible investing is providing investors a host of conscientious vehicles for smart long-term investing.
For years, the notion of socially responsible investing (SRI) — putting your money into companies that represent and uphold your personal values — was considered a fringe strategy.
No longer. Last year, $2.71 trillion — roughly one of out every nine dollars under professional management in the United States — was invested in companies based on their environmental or social records, according to the Social Investment Forum. That’s up from $639 billion of SRI investments in 1995. As interest in — and acceptance of — these so-called “fringe” investments skyrocketed, they have become an investment force to be reckoned with.
Once Fringe; Now a Force
In 1971, PAX World launched what is
widely regarded as the first publicly
available SRI mutual fund, the Pax World
Fund (now called the Pax World
Balanced Fund). The Fund’s founders,
Dr. Elliot “Jack” Corbett and Rev. Dr. Luther
Tyson, a pair of United Methodist ministers,
sought to screen out weapons manufacturers
and other businesses whose
values didn’t mirror their own. This introduced the concept of
screening to the investment world, and began to attract
investors who felt uncomfortable profiting from companies
that went against their values.
The options available to socially conscious investors have
multiplied. Where once they were limited to one or two funds
that screened out companies based on very limited factors,
investments now can screen based on a variety of ethical considerations
to match an investor’s personal values. Today,
“mainstream” mutual fund companies offer as many as 250 SRI
funds, up from just 55 in 1995, according to the Social
Investment Forum. Some of these represent newly conceived
mutual funds and indexes. While others repurpose and refocus
Focusing on the Future
One of the newest strategies to arise from the SRI evolution is
the idea of sustainability investing. Investors interested in sustainability
proactively seek out companies engaged in good
behavior, rather than passively exclude those engaging in bad.
These investors believe that companies with sound environmental,
social and governance (ESG) policies are not only
better ethically, but financially.
This new branch of SRI advocates marrying ESG research
and traditional financial analysis (price-earnings, cash flow,
return on equity, etc.) to aid long-term evaluation, as companies
that ignore these issues often are more likely to incur
financial, institutional and public relations risks in the future.
“It’s become increasingly clear to individual investors and
fiduciaries that having prudent environmental policies, ethical
corporate organization and well-thought-out supply-chain management
helps protect corporations over the long term,” says
Thomas Kuh, managing director of indexes at KLD Research
and Analytics in Boston. KLD is an independent investment
research firm and one of the leading authorities on social
research and indexes.
Sustainability refers to the degree to
which a company’s business practices
address today’s social and environmental
needs without compromising the
quality of life of future generations.
Regardless of their origins, the influx of cash committed to SRI
strategies also reflects that many of these vehicles are earning
well-regarded, appealing returns. For investors, that means it
can pay to put their money where their convictions are.
“There is now overwhelming evidence that you do not
sacrifice performance by investing in this way,” says Joe Keefe,
CEO of Pax World Funds in Portsmouth, N.H. “It has become
apparent that this second layer of research (for sustainability
vehicles) provides a better view of a company’s long-term
Introducing the Northern Global
Sustainability Index Fund
Northern Trust recently launched the Northern Global
Sustainability Index Fund. This fund mirrors the composition and
performance of the KLD Global Sustainability Index, a benchmark
of companies that demonstrate superior management of environmental,
social and corporate governance (ESG) issues. The fund
seeks to balance attention to social benefits with the pursuit of
attractive financial returns by taking a sector-neutral approach to
limit risk, and by assessing companies in all industries to draw
from a broad investment universe.
To find out how socially responsible or sustainability investing
may enhance your overall wealth management program, or to
receive a prospectus for the fund, please contact your relationship
manager or visit northerntrust.com/sri.
Before investing, you should carefully read the prospectus and consider the investment
objectives, risks, charges and expenses of the Northern Global Sustainability
Index Fund. The prospectus contains this and other information about the fund.
Northern Funds Distributors, LLC is not affiliated with Northern Trust.
SRI funds have provided investors with solid historical
returns, as evidenced by the long-term performance of the
Domini 400 Social Index, which comprises 400 primarily largecap
U.S. corporations selected based on social and environmental
standards. Begun in 1990 by KLD Research and Analytics, the Domini benchmark is not only the
first SRI index of its kind, it has also consistently
outperformed the S&P 500. The Domini index was
up 10.85% between its inception May 1, 1990, and
March 31, 2008, compared with 10.41% for the S&P
500 during the same period.
Getting to the Heart of the Matter
Profitability matters, but SRI at its heart still represents
an opportunity to use investments to drive
real-world change. A cornerstone of sustainable
investing, this concept has withstood the evolution
of SRI and remains an overarching consideration in
many advocates’ portfolios. Awareness that ESG
factors affect a company’s bottom line also has fostered
increased shareholder advocacy and community
“Voting on proxy statements is so important,” says
Peter Kinder, president of KLD. “You have to ask,
‘Who is being nominated to the board of directors?
What are a corporation’s compensation provisions?’”
What Is Sustainable Development?
Everyone seems to be talking about sustainability — typically a
shorthand for the concept of sustainable development. Is this
just the latest corporate buzzword, or does sustainable development
really mean something?
KLD Research & Analytics, Inc. has developed a very specific
— and measurable — definition of sustainability for its KLD
Sustainability Index, which rates companies on their business
practices in this area. According to KLD, in a global economy,
sustainability pertains to the effect corporations have on:
- Key stakeholders, such as employees and communities:
supply chain management is critical because of its human
rights, labor rights and community relations implications.
- Society in general: the effect of corporate activity on
public safety and public health; whether and how companies
externalize costs and how those costs might be shifted to
- The environment: how air, water and land pollution
define a firm’s environmental footprint; its efficiency and
pollution-prevention initiatives; environmental management
- Governance: governance practices; ethics policies and
practices (i.e., related to bribery and corruption); lobbying
Understanding the Terms of SRI
Proponents of socially responsible investing (SRI) seem to speak their own
language. And if you’re new to the topic, it can be hard to follow. Here is
a quick primer to some of the more common SRI terms.
Community development: Supporters of community development use their
investments to inject cash into areas that otherwise would not have access to it.
They typically do this by extending loans to people in lower-income communities
that commercial banks avoid because of the credit risks involved. The more
recent micro-credit phenomena could be considered an offshoot of community
development as well.
Screening: When investors who didn’t want their investments to support the
Vietnam War began looking for alternatives, they introduced the concept of
screening to the investment world. Today, investors can screen out companies
engaged in a wide range of behaviors or doing business in certain countries.
Screening remains the most prevalent form of SRI today.
Shareholder activism: Shareholder activism attempts to use shareholders’
power as owners of a company to encourage corporate responsibility or
force companies to change how they operate. This is the second most
common form of SRI.
Sustainability: Many investors now are shifting their focus to a broader
approach to SRI by focusing on companies with policies, products and services
that promote the development of a sustainable economy. Investors following
a sustainability approach believe a company’s environmental, social and
governance (ESG) factors not only benefit the environment and society overall,
but also the company’s current and future profitability.
Often this shareholder advocacy
also can inspire a company
to focus on particular issues that
have become important to shareholders.
For example, the Vietnam War
took center stage during the late
1960s and early ’70s as investors
began to avoid investing in companies
profiting from the war. In
the 1980s, many active SRI
investors divested their portfolios
of companies involved in South
Africa, a move that eventually
helped end apartheid. Today,
workers’ rights in Asia, human
rights issues in Darfur and global
environment — especially climate
control — are issues of concern
for many shareholder advocates.
This environmental concern has
sparked the creation of SRI-related
exchange traded funds (ETFs) that
track indexes related to water,
clean technology, alternative
energy and the crisis in the Sudan.
Your Ethics, Your Portfolio
Although sustainable investing is
challenging many of the established
business maxims, some tried-andtrue
principles remain sound. Most experts agree that investors
wanting to follow an SRI approach should view it as part of an
integrated long-term investment plan. Here are a few guidelines
to help you get started in SRI investing:
- Now that you can choose among a variety of investment
vehicles, decide whether you want to focus on specific
issues that concern you and your family, or if you’d prefer
to take a broader sustainability approach.
- Ensure that your investment manager or family office is
aware of the sophisticated SRI tools now available. These
tools include KLD’s Socrates database, which houses ESG
research on more than 4,000 companies in more than 50
global markets; TrustSimon, which offers social investment
information for all publicly traded companies; and research
offered by RiskMetrics, which ranges from sustainability
assessments to corporate governance analysis.
- Remember sustainable investment products today span
asset classes, and include domestic and international,
small-, mid- or large-cap companies, structured products
As SRI continues to evolve, more and more investors are
discovering that socially responsible investing need not be
driven by good intentions alone but also can help you pursue
“It’s a historical shift,” says Keefe. “Investors are coming to
the realization that their investments no longer need to be out
of alignment with their values. And they’re taking advantage
of the opportunity to do so.”