The 2007 Report on Socially Responsible Investing Trends in the US
Lisa Woll, CEO Social Investment Forum
Socially Responsible Investing Defined
Socially responsible investing (SRI) is an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis. Social investors include individuals, businesses, universities, hospitals, foundations, pension funds, corporations, religious institutions and other non-profit organisations that consciously put their money to work in ways designed to achieve specific financial goals, while pursuing a future based on sustainability and the needs of multiple stakeholders, including employees, their families and communities.
In social investing, asset managers frequently complement traditional quantitative techniques of analysing investment risk and return with analysis, both qualitative and quantitative, of corporate social and environmental policies, practices and impacts. It can be a process of identifying and investing in companies that meet certain standards of Corporate Social Responsibility (CSR) or that reflect the values or mission of the investor. According to the Social Investment Research Analysts Network (SIRAN), a working group of the Social Investment Forum, "CSR includes issues such as environment, health and safety, diversity and human resources policies, and human rights and the supply chain." SRI therefore often involves evaluating companies on CSR issues, analysing corporate social and environmental risks, and engaging corporations to improve their CSR policies and practices. For more information, go to http://www.siran.org.
There is no single approach to social investing, nor is there a single nomenclature for it. Whether described as "responsible investing", "mission-related investing", "ethical investing", "triple bottom line investing", "sustainable investing" or socially responsible investing, the process of integrating social and environmental factors into investment decision-making has clearly become a vibrant segment of capital markets in the US and abroad, and investors are increasingly embracing responsible investing strategies and demanding social investing products and services. As the United Nations Principles for Responsible Investment have highlighted, "[t]here is a growing view among investment professionals that environmental, social and corporate governance (ESG) issues can affect the performance of investment portfolios"1. For individuals and institutions today, responsible investing can be done across asset classes and the opportunities for doing so are multiplying in a variety of ways that this report describes.
Socially Responsible Investment Strategies
Socially responsible investing incorporates three core strategies that work together to promote socially and environmentally responsible business practices and to stimulate positive social and environmental impacts across the economy:
Screening is the practice of evaluating investment portfolios based on social or environmental criteria. Screening may involve excluding or avoiding companies with poor ESG track records, positively filtering a portfolio for companies that have stronger CSR policies and practices, or otherwise incorporating ESG, CSR and sometimes ethical factors into the process of investment analysis, decision-making and management. Generally, social investors seek to own profitable companies that make positive contributions to society. For example, positively screened SRI "buy" lists may include companies that have good relations with their employees and the communities in which they operate; diverse workforces; sustainable business models; sound environmental management policies and practices; products that are safe and useful; or operations that uphold labour standards and human rights around the world. Conversely, social investors may employ negative, avoidance or exclusionary screening that refrains from investing in companies whose products, services and business practices are deemed harmful to individuals, communities or the environment. SRI has traditionally been associated with such negative screening, but avoiding or divesting from certain companies is only one of many tools within the SRI screening strategic toolkit. Indeed, investors are increasingly seeking proactive, positively screened investments, and the screening process can provide the tools for identifying "best-in-class" investment opportunities across sectors.
Shareholder advocacy involves actions many socially aware investors take as asset owners. These efforts include dialoguing with companies on issues of social or environmental concern as well as filing, co-filing and voting on shareholder resolutions. Proxy resolutions on social issues and corporate-governance issues generally aim to improve company policies and practices, encouraging management to exercise good corporate citizenship while promoting long-term shareholder value and financial performance.
Community investing directs capital from investors and lenders to communities that are underserved by traditional financial services. It provides access to credit, equity, capital and basic banking products that these communities would otherwise lack. In the US and around the world, community investing makes it possible for local organisations to provide financial services to low-income individuals and to supply capital for small businesses and vital community services, such as affordable housing, child care and health care.
Executive Summary of the 2007 Report
Socially responsible investing (SRI) is thriving in the US, growing at a faster pace than the broader universe of all investment assets under professional management. Roughly 11% of assets under professional management in the US – nearly one out of every nine dollars – are now involved in SRI.
SRI assets rose more than 324% from US$639 billion in 1995 (the year of the first Report on Socially Responsible Investing Trends in the US) to US$2.71 trillion in 2007. During the same period, the broader universe of assets under professional management increased less than 260% from US$7 trillion to US$25.1 trillion.
From 2005-2007 alone, SRI assets increased more than 18% while the broader universe of professionally managed assets increased less than 3%.
Highlights of the 2007 Report
Total Socially Responsible Investing Assets
The 2007 Trends report identifies US$2.71 trillion in total assets under management using one or more of the three core socially responsible investing strategies – screening, shareholder advocacy and community investing. In the past two years, social investing has enjoyed healthy growth, increasing from US$2.29 trillion in 2005. About one out of every nine dollars under professional management in the US today is involved in socially responsible investing, approximately 11% of the US$25.1 trillion in total assets under management tracked in Nelson Information's Directory of Investment Managers.
Socially and Environmentally Screened Funds
Assets in all types of socially and environmentally screened funds – including mutual funds and exchange-traded funds (ETFs) – rose to US$201.8 billion in 2007, a 13% increase over the US$179 billion tracked in 2005. Over the same period, the number of socially and environmentally screened funds tracked increased from 201 to 260. Among the broader universe of socially and environmentally screened funds, US-registered investment companies, such as mutual funds (including those underlying variable annuity products), ETFs and closed-end funds, accounted for US$174.8 billion, invested through 184 different funds available through more than 60 different fund families.
Mutual funds – The largest share of socially and environmentally screened funds are mutual funds, with US$171.7 billion in total net assets invested in 173 different funds available in 358 different share classes. Of these socially and environmentally screened mutual funds, 19 of them with US$12.5 billion underlay variable annuity products.
Exchange-traded funds (ETFs) – Eight socially and environmentally screened ETFs with US$2.25 billion in total net assets were identified for the first time in this Trends report. Over the course of 2007, another five ETFs were launched to track indices addressing a variety of social and environmental concerns related to water, clean technology, alternative energy and the crisis in the Sudan. Although ETFs accounted for only 1% of the total assets of all socially screened funds at the beginning of 2007, they promise to be a dynamic catalyst for SRI growth in the future.
Closed-end funds – Three socially and environmentally screened closed-end funds with assets of US$850 million were tracked separately for the first time.
Alternative investment funds – An estimated US$5.3 billion in capital were identified under the management of 46 different socially or environmentally screened alternative investment vehicles, such as social venture capital, double and triple bottom line private equity and hedge funds, typically organised as unregistered limited partnerships or limited liability companies and available only to accredited institutional and high net worth investors.
Other pooled products – Nearly 11% of the total assets in all socially screened funds – US$21.7 billion – were invested through 30 other pooled products, typically commingled portfolios managed primarily for institutional investors and high net worth individuals.
Socially and Environmentally Screened Separate Accounts
With more than US$1.9 trillion in assets, socially screened separate accounts managed for institutional and high net worth individual clients constituted the bulk of SRI assets tracked in 2007. Socially and environmentally screened separate account assets have increased nearly 28% from the US$1.5 trillion identified in 2005.
Institutional investors – US$1.88 trillion in assets are managed in institutional client accounts, a 27% increase over the US$1.49 trillion identified in 2005.
High net worth clients – Investment advisers managed US$39.5 billion for individual clients, a US$22.2 billion increase over the US$17.3 billion identified in 2005.
The average level of shareholder support for resolutions on social and environmental issues increased 57% from 9.8% in 2005 to 15.4% in 2007, a record high. The total number of resolutions increased from 360 in 2005 to 367 in 2006. Institutional investors that filed or co-filed resolutions on social or environmental issues controlled US$739 billion in assets in 2007, a more than 5% rise over the US$703 billion in assets counted in 2005.
Assets in community investing institutions rose nearly 32% from US$19.6 billion in 2005 to US$25.8 billion in 2007. The field also continues to expand in terms of the number and diversity of community investing products and services available to US investors.
Major Forces Behind SRI Growth
The following factors are key to the robust growth of SRI:
More and more money managers are incorporating social and environmental factors into their investing practices, acknowledging the demand for social investing products and services from: institutional and individual investors, socially concerned high net worth clients, individuals seeking SRI options in their retirement and college-savings plans and "mission-driven" institutions including foundations, endowments, labour unions and faith-based investors.
New products and fund styles are driving growth in socially and environmentally screened funds, especially ETFs and alternative investment funds such as social venture capital, double and triple bottom line private equity and hedge funds.
A growing concern about climate change and its risk for portfolios is intensifying the interest in SRI among money managers. Investor demand is growing for portfolio opportunities in clean and green technology, alternative and renewable energy, green building and responsible property development, and other environmentally driven businesses.
A large and expanding number of institutional investors are actively supporting shareholder resolutions on social, environmental, and corporate governance issues and joining investor coalitions, such as the Investor Network on Climate Risk, to make their concerns known about the risks and opportunities associated with issues such as climate change.
Increasing numbers of institutional investors, fund families and money managers are incorporating criteria related to the crisis in the Sudan into portfolio management and shareholder advocacy, whether through targeted divestment or active engagement with companies exposed to the risks of doing business in such a volatile, repressive regime.
The expansion of market-rate opportunities and other industry developments are making it easier for a broad range of investors to participate in the expanding field of community investing. Institutional investors are proactively allocating portions of their portfolio to community investing options in order to deepen the social impact of their investments. Investors are also increasingly embracing international microfinance opportunities to promote positive social and economic development abroad.
The Social Investment Forum (SIF) is the only national membership association dedicated to advancing the concept, practice, and growth of socially and environmentally responsible investing (SRI). Its members integrate economic, environmental, social and governance factors into their investment decisions and SIF provides programs and resources to advance this work. For more information on the Trends Report, SRI and membership, go to www.socialinvest.org
This article first appeared in www.socialfunds.com on 5 March 2008. Article reprinted with permission from the GreenMoney Journal, a socially responsible investing newsletter publishing since 1992. For more information, visit GreenMoney Journal online at www.greenmoney.com
1 The UN Principles for Responsible Investment (PRI) have been developed as an investor initiative in partnership with the UN Environment programme Finance Initiative and the UN Global Compact. More than 300 asset owners, investment managers and other investment service providers from around the world, with combined global assets of $10 trillion, have become signatories to the UN PRI. For more information go to- http://www.unpri.org