2005 Report on Socially Responsible Investing Trends in the United States

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Over the past decade, SRI has become a force within the US financial marketplace.

Over the past decade, SRI has become a force within the US financial marketplace.

– Socially and environmentally screened mutual funds have experienced substantial growth in the number and diversity of products and screens offered.

– Mainstream money managers are increasingly incorporating social and environmental factors into their investing.

– A growing number of institutional investors are active owners of the companies in their portfolios, and support for the growing numbers of shareholder resolutions filed on social, environmental, and corporate-governance issues rose dramatically over the last ten years. Shareholder advocacy, whether through the proxy process or in direct dialogue with companies, produced tangible changes in corporate policies and practices.

– Community investing is experiencing significant growth in assets, helping to increase the economic opportunities for lower-income communities and spurring industry developments that are making it easier for a broad range of investors to participate in this expanding field.

– The globalization of socially and environmentally responsible investing continues to advance through a diversity of developments in different regions around the world, from the largest SRI markets in Canada, Europe, Australia and Japan to the more sophisticated emerging markets of Latin America, South Africa and the Asia Pacific region.

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As a practice based on values and moral principles, avoidance screening became one of the basic strategies of social investing. Today, values-based avoidance screening continues to play an important role in SRI, but new screening issues have also emerged, and SRI strategies continue to evolve. Social investors now also employ portfolio screening to select companies with positive attributes for investment. This practice is based on the identification of companies that meet or exceed certain standards for corporate conduct, or stand out as “best in class” in an industry. Positive screening is based on the principle that investors actively seek to support companies whose social and environmental records are consistent with good corporate citizenship. Motivated by a desire to set standards for, and improve, corporate social and environmental performance, social investors use such positive screening techniques to identify companies with competitive advantages over their peers, many of which may be intangible in nature. Positive screening also provides a means for regular monitoring of companies that are chosen for inclusion within a portfolio.

The issues that social investors use as screens—both positive and negative—evolve over time. Divestment from companies in South Africa obviously faded after the end of Apartheid.

Analogous concerns about human rights and repressive regimes have led socially aware investors to look closely at companies facing social, political, and reputational risks due to their international operations. For example, some social investors have screened out companies doing business in Burma, Sudan, or other states with poor track records on labour standards and human rights or where conflict, civil strife, terrorism, or pandemic diseases are daily realities of the business climate. Concerns among investors over the risks associated with climate change have broadened the scope of environmental screening to encompass much more than mere compliance with environmental protection regulations.

How companies disclose their social and environmental impacts, risks, and performance and whether they use reporting standards and benchmarks or adhere to codes of conduct in areas such as human rights, supply-chain management, and genetically modified organisms (GMOs) or other biotechnology, have all become questions social investment analysts now routinely ask of the companies they cover. Whether in the US or abroad, human rights, equal opportunity, labor relations, environmental protection, consumer-product safety, and community impact have become issues of concern for socially responsible investors who expect from the companies in which they invest both positive financial returns and strong social and environmental performance.

While often incorporated into conventional financial analysis, corporate governance has now also become a criterion for evaluation by many in the SRI community as well, particularly in the wake of corporate scandals at companies with poor governance policies and practices.

Indeed, among corporate leaders, academic researchers, and even mainstream money managers, there is a growing realization, rooted in empirical research, that enterprises that adopt sustainable business practices will be more competitively situated to deliver stronger returns and long-term shareholder value. The emergence and evolution of different types of screening over time reflect the social investors’ roles not only in promoting stronger corporate citizenship and social responsibility but also in building long-term wealth for companies, their shareholders, their stakeholders, and the communities in which they do business.

Converging strategies: active ownership and community impact

In the past ten years, there has been a dramatic rise in the number of social investors who use avoidance and positive screens as one part of a broader SRI agenda. By using strategies of shareholder advocacy and community investing as well as screening, SRI practitioners can hold companies even more deeply accountable for their social and environmental practices and foster sustainable development in financially underserved communities. Many portfolio managers and advisers now dedicate a percentage of their portfolios to community investing institutions. And social investors in mutual funds,

pension funds, and other portfolios are also becoming active in shareholder advocacy in record numbers, by fi ling resolutions or engaging in dialogue to pressure companies to become more responsible on a particular social, environmental, or corporate-governance issue.

One of the fundamental objectives of social investment is to achieve a higher level of accountability of corporations to all their stakeholders. For decades, social investors have sought greater transparency and disclosure from companies by screening portfolios, filing resolutions, and engaging in dialogue. The many corporate scandals of recent years have resulted in reforms that require more transparency and disclosure. Recent focus on addressing the crisis of confidence facing corporations has given affirmation to these principles and practices.

Issues now occupying mainstream consciousness—corporate governance, transparency, accountability, and greater disclosure of information—have long been central to the practice of social investing.

2005 Report on Socially Responsible Investing Trends in the United States

Social Investment Forum,

January 2006.

http://www.socialinvest.org/resources/research/

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