Pension funds, institutional investors, and consumers are eyeing fund portfolios that not only earn substantial income, but also support businesses that address environmental and ethical factors.
Former U.S. Vice President and environmentalist, Al Gore and his business partner David Blood, former CEO of Goldman Sachs Asset Management, recently discussed socially responsible investing (SRI) in a May 2007 interview with the McKinsey Quarterly, the publishing arm of consulting firm McKinsey & Co.
"Sustainability investing is the explicit recognition that social, economic, environmental, and ethical factors directly affect business strategy," explained Blood.
Blood maintained that investors scrutinize "how companies attract and retain employees, how they manage the risks and create opportunities from climate change, a company's culture, corporate-governance standards, stakeholder-engagement strategies, philanthropy, reputation, and brand management" before buying into an investment portfolio.
Today's investors have become more sophisticated and vocal. No longer are substantial earnings the only criteria for assessing investments. Investors expect adherence to and knowledge of regulatory issues and environmental concerns. Moreover, social and moral factors should be integrated into the respective firm's business model.
SRI in a Nutshell
The investor involved in the sustainable investing trend focuses on social trends, personal values and naturally financial profitability when choosing an investment portfolio, according to Edgewood Partners, LLC, an investment advisory firm promoting SRI.
"The investment objective considers not only the investor's financial needs and financial return, but also the investments' impact on society and environment," explained the firm on its website.
SRI has again gained many followers since the mid-1980s. A similar trend began even before then. Investors in that era were not concerned about the current topics of ecology, regulatory and other issues, but rather, "sinful investments." Those investors did not invest in firms that manufactured ammunition, guns, tobacco and alcohol. Investors' social and environment concerns began to take a foothold about 20 years ago.
Acceptable social, ethical and environmental behavior may vary from investor to investor and country to country. American, Canadian and European businesses are more likely to show greater concern for ethics in business and are more interested in social activism and environmental problems because of public scrutiny, than businesses in Third World Countries.
The World of Sustainable Investments
By the end of last month, more than 180 investment firms and fund managers from around the globe with a total of $8 trillion under management have voluntarily agreed to abide by the United Nations "Principles for Responsible Investments (PRI)."
In the U.S., several retirement funds—including the New York City Employees Retirement System—have pledged to uphold PRI. Large investment firms have also funds that abide by the PRI, including JP Morgan Asset Management (U.S.), ABN Amro Assets Management (Netherlands), BNP Paribas Asset Management (France) and HSBC Group Investment (UK).
In 2006, the United Nation launched the voluntary PRIs, as an outgrowth of the U.N. business ethics initiative, under the U.N. Environment Program Finance Initiative and the U.N. Global Compact. The PRI initiative is under the auspice of a voluntary board whose members are asset owners, firms who signed the pledge and two U.N. representatives.
Industry Achieving Social Responsibility
Al Gore points to Novo Nordisk, a Denmark-based pharmaceutical company that specializes in diabetes as a socially and ecologically responsible firm. Novo Nordisk pledged recently that it will fully use wind farm-produced electricity, also known as green electricity, in all of its production sites by 2020.
"Sustainability issues have moved into the corporate mainstream," disclosed Peter D. Kinder, president of KLD Research & Analytics, Inc., an independent investment research firm. "49 of S&P [Standard & Poor's] 100 companies issued comprehensive reports' in the 2005-2006 reporting period, eleven for the first time. Those are significant, impressive numbers."
At the end of the last two fiscal years, close to 50 percent of U.S. companies on the S&P 100 Index have disclosed governance, social and environmental performance factors that are part of their business strategy. Close to 40 percent announced that they have prescribed to the "Sustainability Reporting Guidelines," according to a SIRAN-KLD Study, published by Social Investment Research Analyst Network (SIRAN), a not-for-profit organization involved in socially responsible investing.
Feeds