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Is socially responsible investing (SRI) a sophisticated and more
effective way to manage money, or is it really just social change
activism? I'm going to argue its been a confused mixture of both
and it is now time to clearly separate what are two quite different
approaches trading under one name.
In the early 90's when I was at Greenpeace Australia, some of
us became fascinated by the power of the financial markets to drive
social change. Our financial market literacy at the time was probably
best described as "emerging." However it was clear even to us that
if you could mobilize this beast, the power for practical social
change was enormous. The logic was simple. If investors and their
proxies demanded higher performance on environmental issues because
they believed it would build financial performance, the rush to
environmentalism by the corporate sector would stampede activism
in its path!
Of course we weren't alone. All around the world, those involved
in the early SRI scene were hard at work trying to make this idea
a reality. Born from a narrow, but legitimate desire by religious
groups to ensure their money was not used against their values,
some in the SRI community in the early 90's saw a serious opportunity
to go mainstream.
Thereby was born a great expansion of SRI funds through the 90's
and beyond, with many motivations. Some were activists—recognizing
the power of mobilizing markets to drive social change. Others wanted
to differentiate themselves as fund managers and believed stock
picking using sustainability screens would deliver improved financial
performance. Others still saw the business opportunity in appealing
to increasingly concerned retail investors. All of these motivations
were sound and logical, but the combination of them left the SRI-cum-ethical
sector confused and I would argue not really a sector but rather
two—the activist disguised as fund managers ("negative screeners")
and the fund managers disguised as activists ("best of sectorers").
Thus began a series of debates. The best-of-sector advocates argued
that sustainability was an indicator of likely financial performance
and that alone was the necessary basis for investing in SRI funds.
These companies would outperform because they were better managed.
The negative-screeners argued that some sectors and companies were
inherently not good for society and were therefore bad investments
morally and ultimately financially.
This period was also when most attention was being paid to the
actual performance of the SRI sector. The idea of serious comparison
with the rest of the financial markets was actually quite flawed.
Many funds were run by people whose main motivation was social change
and inevitably an activist view on investment is heavily influenced
by what you want the world to be like rather than how it actually
is.
The world is changing and the logic that the market will follow
is sound over time, but meanwhile other things happen. I saw a devastating
analysis comparing the financial performance of sustainability darling
Interface with sustainability Darth Vaders Exxon over many years.
You guessed it—Exxon left them for dead! The trouble is that
in these dying days of "business as usual" (days which are going
on for some decades!), oil prices go up, technology bubbles burst
and all sorts of other influences impact performance.
And meanwhile, many SRI funds were (and still are) being managed
not with a focused analysis of likely financial performance over
the investment cycle, but a belief, or dare I say it, a desire that
this is how the world should be. Much of what has passed as SRI
analysis has in reality been little more than anecdotal snippets,
or emphasis on issues that were frankly not material to financial
performance. I know of many companies that fulfilled quite superficial
requirements to get into SRI indices and funds, such as hobbling
together a Board policy with little intention of doing anything
more substantial.
It is therefore quite surprising that comprehensive analysis of
large groupings of SRI funds over time show they at least equal
and probably outperform traditional investment approaches. It is
a testimony to the quality of some of the managers in this sector,
and a strong reinforcement of the logic that managing sustainability
= quality of management.
So where to now?
The SRI community needs to split in two so we can make our investment
decisions accordingly. We need "activist investing" that focuses
on social change and negatively screens those companies that are
inherently unsustainable. And we need "sustainability investing"
that uses these issues as an investment insight and as a result
delivers greater returns.
As a life-long activist, I want my personal money to be in companies
I believe are part of a sustainable future. I'm prepared to take
the risk that I might be ahead of the market and pay a price or
I might make a larger return because I've predicted the future well.
So with my money, I'd be an "activist investor" and feel good about
it. However, we activists are by definition not the majority. So
that approach will not convert the financial markets that pursue
value ruthlessly and efficiently and measure that potential for
value over years not decades. And it will not sell to the majority
of mainstream retail investors.
Arguing that activist investing is morally or values driven is
correct and honest and will sell to the niche market that finds
this appealing. Representing that its focus is on delivering a good
financial return is arguably unethical.
The mainstream future is clear and best-of-sector is the answer.
Defined by groups like Sustainability Asset Management and Innovest,
this type of analysis is already influential and will soon effectively
become the mainstream. Why?
Sustainability is a powerful investment insight because sustainability
does frame the market of the future. It does so at many different
levels—defining new market and technology opportunities, attracting
and retaining talent, providing lower risk growth, reducing costs,
increasing community support and so forth. Boards and management
teams that get this, and develop the ability to manage the ambiguity
and complexity inherent in sustainability, will outperform their
competitors. And yes, they will do so over time horizons relevant
to financial markets.
The investors and analysts who understand this need to be clearly
differentiated from the activists. They should be proud to be value-focused
and clearly and unambiguously advocate that they take this approach
because it will deliver better returns. Success will come when SRI
is a financial rather than an ideological question. Only then will
we drive real and substantial change and, ironically, the activists
will get their desired result.
Paul Gilding (paul.gilding@ecoscorp.com) is the founder and CEO of
Ecos Corporation, which provides strategic advice to corporations
on how to create value
through sustainability. |
