Does Socially Responsible Investing Work?
For several decades, most investors in the financial markets were only motivated by profit considerations. Their investment decisions were mostly based on the financial growth of a company, while its practices and long-term impacts were not part of the decision-making process.
In January 2004, the Secretary General of the United Nations and recipient of a Nobel Peace Prize Kofi Annan observed that «while finance is the engine of the global economy, investment decisions and shareholder practices do not reflect social and environmental considerations not enough»(BNP Paribas, 2006). He wants to change things. Kofi Annan writes to 50 leaders of the world’s largest financial institutions, inviting them to participate in a common initiative with one specific goal: finding ways to integrate social and environmental considerations into the finance field. With the support of the United Nations and a committee of decision-makers and international representatives, the financial leaders play the game. For five days, they deliberate and finally agree on six major Principles for Responsible Investment (PRI) (UN, 2006). These principles recognize socially responsible investing and encourage financial industry players to adhere to them.
What is Socially Responsible Investing?
Socially Responsible Investing (SRI) is the consideration of environmental, social and governance factors, in addition to traditional performance factors in the analysis of a security. These analysis criteria are called ESG factors and deal with a wide variety of issues for companies, including their way of responding to climate change, their management of customer private data, the working conditions of their employees, their corporate culture, etc. This dimension of analysis is not common in the field of finance but has grown significantly in recent years. Socially responsible investing aims to offer, in addition to financial returns, concrete social benefits, for example poverty reduction or a reduction in tobacco and weapons sales.
What is the size of the movement?
Recently, socially responsible investing has boomed, thanks to better access to ESG information and the millennials starting to save money. This generation, formed by those born between the early 1980s and the late 1990s, has evolved in the context of the climate crisis and therefore wants to make a difference. For millennials, the goal of investing is no longer just to make money, but also to have a positive influence on society. A 2018 survey (U.S. Trust, Bank of America Private Wealth Management, 2018) found that 87% of high-net-worth millennials see a company’s ESG rating as an important decision factor in their financial decisions. Another study (Morgan Stanley, 2019) claims that 90% of millennials want to align their investments with their personal values. Dave Nadig of ETF.com sums it up this way: “We’re in the middle of a $30 trillion intergenerational wealth transfer from baby boomers to their children. And those kids—not really millennials only, but people from 25 to 40 years old – simply think about their investment decisions differently.” (MSCI ESG Research LLC, 2020).
Figure 1. Evolution of the United Nations Principles for Responsible Investment (PRI) initiative (ONU, 2019).
Does the SRI movement have real impacts?
At this point, the concept of socially responsible investing has been acquired: investing your money in companies who share your values and whose activities have a positive impact on society. In other words, take advantage of your investments to make a difference. But does SRI really make a difference on society? The question is simple, but the answer is less. A study published in 2015 (van Dijk-de Groot & Nijhof, 2015) indicates that the actual impacts of socially responsible investment on society are poorly documented. In fact, researchers are mainly interested in comparing the performance of SRI portfolios with traditional portfolios. Like the authors explain, most researchers question whether doing good pays off rather than whether SRI actions actually do good. Thus, there is little evidence to show that investing in a socially responsible way makes positive and tangible impacts on society. Indeed, it is very difficult to prove that the contribution of capital that an investment brings in a company generates a positive impact for the society. For example, investing in a solar panel company may appear laudable, but it is not an end in itself. If your investment in the company helps it replace another nearly identical solar panel company, there would little or no social impact. Another study published in 2019 (Hillebrandt & Halstead, 2019) points out that it is difficult to identify viable companies (which manage to make a profit) while having an impact on society. In fact, their research suggests that most investors do not conduct rigorous or analytical impact assessments. Depending on the context, the authors argue that for maximum social impact, donating to an association is often the most effective option, when done with care. In Quebec, you can benefit from tax credits when you donate. However, this solution departs from the principle of investment. The authors strongly insist that socially responsible investing remains an attractive choice and that it can only be better than investing your money anywhere, from a social point of view. Even if the effect of an investment in an SRI fund that trades on the financial markets can sometimes be only modest, this choice still exerts upward pressure towards better environmental, social and security standards governance in our societies. A final study (Häbler, 2013) emphasizes this point. It explains that the general responsible investment movement is putting pressure on companies. They will increasingly have to meet the expectations of investors in terms of social and environmental performance and encourage them to turn to practices that respect the principles proposed by the United Nations.
Does socially responsible investing offer such good returns?
Finally, you might wonder whether socially responsible investment generates good returns. The simple answer to that question is yes, it does. An article published in the Journal of Sustainable Finance & Investment in November 2015 (Friede, Busch, & Bassen, 2015) gathered data from more than 2,000 empirical studies carried out in recent years on the effects of ESG criteria on the financial performance of companies. The completeness of the exercise has also enabled important conclusions to be drawn : most of the studies show that investing using ESG criteria does not adversely affect the performance of a portfolio. Indeed, 90% of studies have found a non-negative correlation between integration of ESG standards and financial performance. Moreover, a large majority of studies report that ESG criteria and portfolio performance are positively correlated. In addition, this relation would be stable over time. In other words, contrary to popular belief, it can pay off to invest in a socially responsible manner, in every sense of the word!
If you are interested in the concept of socially responsible investing, there are many mutual funds and exchange-traded funds (ETFs) identified with ESG and SRI standards. A quick research on Internet will give you information on this subject. Otherwise, MorningStar published an article last September listing their top 10 ETFs that meet ESG standards. I encourage you to take a look:
Figure 2 : Top 10 ESG ETFs according to MorningStar (https://www.morningstar.ca/ca/news/205620/10-esg-funds-for-passive-investors.aspx)
For those who prefer an active management of their portfolio, here is the top ten mutual funds for socially responsible investing according to Morningstar:
Figure 3 : Top 10 SRI mutual funds according to MorningStar (https://www.morningstar.ca/ca/news/201554/10-top-sustainable-mutual-funds-in-canada.aspx)
Although they may not always seem important, our investment decisions have a real impact on our society. Whether or not taking ESG factors into account when investing, the choice is ours! I hope you have learned much about socially responsible investing and that you will be encouraged to discuss the concept with your financial advisor!
BNP Paribas. (2006, Mai 5). Les Principes pour l’Investissement Responsable – UNEP-Fi. Récupéré sur BNP Paribas: https://bnpparibas.be/fr/2006/05/05/les-principes-pour-linvestissement-responsable-unep-fi/
Eccles, R., & Klimenko, S. (2019). The Investor Revolution. Harvard Business Review. Récupéré sur https://hbr.org/2019/05/the-investor-revolution
Friede, G., Busch, T., & Bassen, A. (2015). ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance & Investment, 5( ), 210-233. Récupéré sur https://www.tandfonline.com/doi/full/10.1080/20430795.2015.1118917
Häbler, R. (2013). The Impact of SRI – An Empirical Analysis of the Impact of Socially Responsible Investments on Companies. Récupéré sur https://www.researchgate.net/publication/276057461_The_Impact_of_SRI_-_An_Empirical_Analysis_of_the_Impact_of_Socially_Responsible_Investments_on_Companies_by_oekom_research
Hillebrandt, H., & Halstead, J. (2019). Donating effectively is usually better than Impact Investing. Récupéré sur Let’s Fund: https://lets-fund.org/impact-investing/#ftnt1
Morgan Stanley. (2019). Morgan Stanley Institute for Sustainable Investing: Sustainable Signals — The Individual Investor Perspective. Récupéré sur https://www.morganstanley.com/pub/content/dam/msdotcom/infographics/sustainable-investing/Sustainable_Signals_Individual_Investor_White_Paper_Final.pdf
MSCI ESG Research LLC. (2020). Swipe to invest: the story behind millennials and ESG investing. Récupéré sur https://www.msci.com/documents/10199/07e7a7d3-59c3-4d0b-b0b5-029e8fd3974b
ONU. (2006). Principes pour l’Investissement Responsable. Récupéré sur http://rse.cgem.ma/upload/Principes_Investissement_Responsable%20_ONU.pdf
ONU. (2019). Principes pour l’Investissement Responsable. Récupéré sur https://www.unpri.org/download?ac=10965
U.S. Trust, Bank of America Private Wealth Management. (2018). U.S. Trust Insights on Wealth and Worth. Récupéré sur https://newsroom.bankofamerica.com/system/files/2018_US_Trust_Insights_on_Wealth_and_Worth_Overview.pdf
van Dijk-de Groot, M., & Nijhof, A. (2015). Socially Responsible Investment Funds: a review of research priorities and strategic options. Journal of Sustainable Finance & Investment, 5, 178-204. Récupéré sur https://www.tandfonline.com/doi/full/10.1080/20430795.2015.1100035?scroll=top&needAccess=true