How can you put your money to good use in terms of helping save the planet and yet make good money from it? Welcome to the world of socially responsible investing (SRI), also known as sustainable and responsible investing (SRI) - an investment discipline that considers environment, social and corporate governance (ESG) criteria in selecting stocks that go into equity portfolios.That would for example mean preference for solar/wind power companies over thermal ones (environment), avoidance of cigarette companies and casino operators (social) etc.

Is this just a fad? Not really - at $ 8.7 trillion, ESG investing now accounts for a staggering 21% of all equity money managed globally. Does it only make sense socially and not financially? No - the best thing about SRI/ESG investing is that data shows that ESG driven portfolios are consistently overrepresented in the top two quartiles of returns and the bottom two quartiles of volatility. So what's the secret behind the success of ESG driven investing? Quite simply, managements that score high on ESG criteria are often the more forward-thinking ones with long term perspectives on their businesses - which in turn enables them to deliver superior long term stock performance.

When you do good and make money, isn't that the best way to make money?

SRI investing defined

The Forum for Sustainable and Responsible Investment, US SIF, defines sustainable investing, as sustainable, responsible and impact investing (SRI). It is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.

According to the US SIF: 'just as there is no single approach to SRI, there is no single term to describe it. Depending on their emphasis, investors use such labels as: "community investing," "ethical investing," "green investing," "impact investing," "mission-related investing," "responsible investing," "socially responsible investing," "sustainable investing" and "values-based investing," among others.'

Why SRI

People mostly opt for SRI because they passionately believe in causes dear to their hearts and personal values, like saving the environment, gender equity, gay rights and institutional goals that include social justice and such other causes. Investments are made in clean technology stocks, community development loan funds and such instruments that advance societal or environmental benefits. However many use SRI to financially outperform markets even if that be only over the long term. There are good and strong links between SRI/ESG investment and sound financial performance. ESG is also utilised to check the quality of managements of target companies.

Strategies

Investors usually try to include values such as, the consideration of community, environmental and other societal and corporate governance (ESG) criteria in investment analysis and building portfolios across a band of asset classes. Equally, the community investing segment, seeks to specifically finance projects or institutions that will serve poor and underserved communities around the world.

Another strategy, used mainly by those who invest in shares in publicly traded companies, is through the practise of shareholder engagement.

Having shares in a company gives investors the right to file shareholder resolutions. Through these resolutions, investors can raise social, environmental and corporate governance issues that concern them the most. For instance, investors can file advisory shareholder resolutions at US companies. Such resolutions may go to a vote by all shareholders. Shareholders can thus invite the management's attention to important issues. There have been resolutions asking companies for better disclosure and oversight of their political contributions. Similarly, social and environmental resolutions have addressed climate change, human rights, equal employment opportunity and sustainability reporting. Further, investors filed resolutions questioning companies on their governance structures and practices, issues related to board elections, executive pay and responsiveness to shareholders. An important benefit of such moves is that they often attract media attention as well, thus contributing to the education of the general public on issues of societal concern.

Apart from filing resolutions, investors can vote for their proxies. Many investors choose to have a dialogue with the managements. Others promote shareholder coalitions to push companies to improve performance on issues related to corporate social responsibility. Investors also actively engage in promoting dialogue of public policy and work with government regulatory authorities to improve compliance metrics.

From 2014 through the first half of 2016, more than 200 institutional investors and money managers collectively controlling a total of at least $2.56 trillion in assets filed or co-filed shareholder resolutions on ESG issues. Investors filed more than 700 resolutions relating to environmental, social and key governance issues for the 2016 proxy season. (US SIF)

Size of SRI

According to the US SIF at the end of 2015, there was a humungous $8.72 trillion in assets under SRI/ESG management. In the 2014 to 2016 period, this segment has soared 33% from $6.57 trillion. SRI/ESG claims about 22% of the total $40.3 trillion in assets under professional management in the US. The assets to which money managers apply ESG criteria have increased substantially from $4.8 trillion in 2014 to $8.1 trillion in 2016.

Who are the investors?

SRI/ESG investors consist of a broad spectrum of individuals, very high net worth individuals, small retail investors and family offices. Institutions include investment management firms, non-profit organisations, religious institutions and universities. The following examples are given by the US SIF:

1. Individuals who invest-as part of their savings or retirement plans-in mutual funds that specialize in seeking companies with good labour and environmental practices.

2. Credit unions and community development banks that have a specific mission of serving low- and middle-income communities.

3. Hospitals and medical schools that refuse to invest in tobacco companies.

4. Foundations that support community development loan funds and other high social impact investments in line with their missions.

5. Religious institutions that file shareholder resolutions to urge companies in their portfolios to meet strong ethical and governance standards.

6. Venture capitalists that identify and develop companies that produce environmental services, create jobs in low-income communities or provide other societal benefits.

7. Responsible property funds that help develop or retrofit residential and commercial buildings to high energy efficiency standards.

8. Public pension plan officials who have encouraged companies in which they invest to reduce their greenhouse gas emissions and to factor climate change into their strategic planning.

Sustainable investment strategies strive to encourage responsible business practices and to allocate capital for social and environmental benefits across the economy. Many people feel that a portfolio based on a SRI platform would have to pay a certain price,in terms of money, for having goals other than pure return in their sights. However, this is not so. Indeed, it can be argued that over the long term investors will get better returns since there is an extra level of analysis that goes into the stock selection process. A portfolio built on sound values and good governance inherently carries a lesser amount of risk. Several studies on this topic have shown that there are no good reasons to conclude that a SRI/ESG based portfolio would have any negative effect on investment rates of return.

In fact many investors would be surprised at how financially sound a SRI/ESG portfolio really is.It would be difficult argue against the companies that form its component stocks. Indeed, it could become one of the best portfolios one ever invested in.

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