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Corporate Social Responsibility (CSR) is an idea that corporations have to consider the interests of customers, employees, shareholders, communities, and ecological considerations in all
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Socially responsible investing (SRI) describes an investment strategy which combines the intentions to maximize both financial return and social good.
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green@work : Magazine : Back Issues : Summer 2005 : Single Bottom Line Sustainability

Single Bottom Line Sustainability

Is the Socially Responsible Investing Sector Being Responsible?
Success will come when SRI is a financial rather than an ideological question.

By Paul Gilding


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.

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