It used to be that when clients said they wanted to make a difference with their dollars, their financial advisers would tell them to make as much money as possible, and then donate the profits to charity.
The mainstreaming of responsible investing—which can also be referred to as green investing, mission investing, sustainable investing, conscious capital, and many other names—makes it clear that times have changed. Investors now have hundreds of options to invest directly in the change they want to see in the world.
It was the 2008 financial system collapse that really boosted investor interest, as a concerning level of systemic greed and deception was exposed, according to advisers and advocates interviewed for this article.
Another watershed moment was when studies began to prove that socially responsible investing was just as profitable, if not more so, than traditional investing. Links that show a financial risk to practices that harm the environment, harm human health, treat workers badly, fail to promote women, and many others, are key to driving investor demands for these types of disclosures.
Rooted in Religious Liberty
Practitioners trace the roots of the movement to American religious organizations such as the Methodist Church and the Quakers, who refused to support sins such as slavery, liquor, tobacco, and war.Divestment, which is a financial expression of one’s freedom to say no, is known for helping to end apartheid in South Africa. There have been other examples too, such as financial protests against the Vietnam War and against the genocide in Darfur, Sudan.
Divestment is an example of what is called a negative screen. It wasn’t until the late 1970s and early 1980s that the category really broadened to include positive screens for the types of criteria investors cared about, which led to new and specialized asset instruments.
Personal Impact
Bob Goellner is the founder and owner of Common Interests, a family wealth financial advisory firm based in New Jersey. He got his start in responsible investing when the insurance company he worked for purchased one of the early responsible investment pioneers, Calvert Investments, and it was housed in the same office.“As they evolved, I just rode along,” said Goellner, but then he changed companies and found himself watching the evolution of the category from a distance.
Finally, it was the financial crisis that got him to consider opening his own firm. He thought to himself: “This is a way of us doing it ourselves, and ensuring for ourselves that the companies we are invested in are not on the bad guy list.”
As a child, Maphalala’s father fled apartheid with his family, and it made a huge impression on her.
She later witnessed firsthand the positive impact of a forestry project in Nigeria, and then saw how a disconnect in funding was missing the mark for a needy community in Hawaii.
She became obsessed with making finance work for maximum impact, and that is when she found social finance “a very powerful way to move money into things that matter.”
Activist Investors
One of the most edgy aspects of responsible investing is its shareholder activism. If investors desire, they have channels to hold companies responsible for their commitments, and to push for further change and accountability.This can happen through letters, phone calls, meetings, and more formally, a shareholder’s resolution.
Measuring Success
In the last six years, almost all the major banks have made commitments to responsible investing, signaling that the category has moved into the mainstream.“Small parts of the firm [banks] are deeply engaged,” said Woll, and they recognize there is something really valuable in doing this. “In the next decade, there is an opportunity to expand this to a broader part of the firm,” she added.
Wood said he has “huge concerns” with the big banks getting involved, and it potentially leading to regulatory or industry capture.
Responsible investing is about long-term thinking, he said, which is at odds with the current dominant paradigm of capital flows designed for short-term gains and rent seeking, a financial term for economic gain that does not reciprocate by generating any benefit to society.
He wants to use this moment to reclaim our control over the markets, and “to have that discussion,” he said, adding that some of the root understandings need to be changed.
“The interests of investors and society will align over the long term,” he said.
Investors Push for Change
Investors have many tools they can use to push companies to change their practices. A few examples of active campaigns are below.
Reduced Funding for Guns After Sandy HookIn the past two years, consideration of these criteria by money managers has grown nearly four-fold in asset-adjusted terms, incorporated by 292 investment vehicles representing $588 billion in assets. Among institutional asset owners, concerns over military and weapons production now apply to $355 billion in assets, a nearly five-fold increase.
Climate change concerns account for one of the biggest categories of investor action. Many advocates credit millennials with pushing their universities and colleges to divest from investments in fossil fuel companies. Today, there is a growing number of investment options that screen out fossil fuel interests.
Palm oil production is a leading driver of tropical deforestation, and the subject of considerable consumer concern, so major food companies were motivated to come to the table on the issue. Suppliers can either comply with the new sustainability standards or risk losing market access.
Signatories to the letter included major food companies Mars, Carrefour, Dunkin Brands, Albertsons-Safeway, Coop Switzerland, Seventh Generation, The Kellogg Company, General Mills, ConAgra Foods, Starbucks, Wal-Mart Stores, and five of the top 10 corporate purchasers of palm oil.
