ROADMAP FOR CONSCIOUS INVESTING
Part 3: From Idea to Action: Socially Responsible, Impact Investing and ESG Analysis: Powering the Growing Green Economy
I believe that investors are coming to the understanding that a Socially Responsible investment (SRI) in the marketplace is a creative act, a vote for the kind of world you want to live in.
Chances are you have heard of SRI, Impact Investing and/or Environmental, Social & Corporate Governance (ESG) screening. Further, it is probable that you have not yet fully committed your investment dollars to the Impact Investing model. If you have, congratulations, you are participating in one the 21st century’s highest impact transformations: the evolution from a single bottom line to a triple bottom line economic model. Hopefully, this article will help you gain clarity and a commitment to action towards what is at once a broad social & economic movement and at the same time an intensely personal process.
Growth of Impact Investing
Just what is at the heart of the enthusiasm surrounding SRI and Impact investing? I believe it is that investors are coming to understand that an investment in the marketplace is a creative act, a vote for the kind of world you want to live in. Currently it is estimated that 53% of American households have some form of stock ownership. The implication of this ownership is encouraging. Stockholders -- driven by the design framework of Impact Investing and using ESG screening – are more empowered to realize the ideal of participatory capitalism at the level of the common stockholder. Today, the three primary tools deployed by the Impact investment sector are: Environmental, Social and Governance (ESG) portfolio screening, shareholder activism, and community investments driven by equity crowdfunding sites. Judging by the numbers, the SRI movement is catching on. At the end of 1997 roughly $1 trillion was invested under the banner of SRI/ESG investments. As of the end of 2020, that number has topped an estimated $22 trillion1. (https://www.ussif.org/fastfacts)
Portfolio Screening
The practice of ESG portfolio screening utilizes both negative or avoidance screening and proactive, positive screening when selecting specific companies for investment. Avoidance screening has been the dominant practice whereby the manager avoids companies whose policies are not consistent with the investor’s values or ethical standards. Nuclear power, weapons manufacturing, and animal testing are a few examples of avoidance screening used by ESG investors2. Perhaps, the most powerful historical display of how avoidance screening can effect real social change was its contribution in ending Apartheid in South Africa in the 1980s. Through the practice of divesting from international corporations doing business in South Africa, investors financially penalized the stock prices of these companies and thereby contributed to weakening the political and economic case for Apartheid. This example put corporate directors on notice that the financial and brand consequences of unethical or amoral business practices can be very high.
Positive screening on the other hand involves the proactive inclusion of sectors or company products and practices that fulfill the investor’s values and ethical standards while remaining consistent with their ESG screening investment objectives.
Shareholder Activism
Shareholder activism takes the Impact investor into a more proactive stance. With ~$22 trillion of muscle, SRI coalitions are able to spotlight issues and sponsor shareholder resolutions for reform. A recent example was a resolution sponsored by As you Sow, the nation’s leading shareholder advocacy organization, which put to a shareholder vote a proposal to have Dupont management report on spills of plastic pellets into the local ecology. While management opposed the resolution, 81.2% of shareholders voted to approve the resolution. (https://www.asyousow.org/press-releases/2021/5/3/dupont-shareholders-approve-plastic-pellet-pollution-reporting) The growing use of shareholder activism like this holds tremendous potential in supporting public corporations in the creation of more life-supporting and sustainable business practices.
Community Investing
Community investing builds on the principle that “change begins with me in my own back yard.” Over the last several decades, Impact Investments into entities such as Community Development Financial Institutions (CDFIs) as well as the work of community development networks such as Slow Money and the Business Alliance for Local Living Economies3 (BALLE) have contributed to the large growth of community investment channels enabled by equity crowdfunding. This rewiring of the investment landscape represents a constructive rebalancing in the flow of investment capital from Wall Street to Main Street. The April 2012 passage of the Equity Crowdfunding bill, as part of the 2012 JOBS Act, is a recent example of the positive evolution in this community investment trend. Given that the majority of Americans work for private businesses within their communities, an increase of community investment is likely to lead to greater community vitality and economic resiliency4.
Impact Investing and the Big Picture
The real work begins when you move from the idea of Impact Investing supported by ESG screening and into action with your investment dollars. Is values based avoidance and ESG social screening enough, or are shareholder activism and community investing attractive options to you? Building a well-rounded investment portfolio involves balancing the tradeoffs between performance, risk and ideals. Ultimately this is a very personal equation crafted of careful thought and selection.
In the quest to build a more environmentally sound and socially just world it is critical that we as investors make the connection that our investment dollars have creative impact and are a vote for the kind of world we want to live in. Choose wisely.
Footnotes:
1. US SIF - http://ussif.org/resources/sriguide/srifacts.cfm
2. UN Principles of Responsible Investing - http://www.unpri.org/principles/
3. Business Alliance for Local Living Economies - http://www.livingeconomies.org/
4. Shulman, Michael, “Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street and Achieve Real Prosperity”
5. Eisenstein, Charles, “Sacred Economics: Money, Gift, and Society in the Age of Transition”