Here’s what you need to know about it.

What is SRI/ESG investing?

Sustainable, responsible and impact investing (SRI) is a type or style of investing that considers environmental, social and corporate governance (ESG) issues while striving to generate competitive financial returns and making a positive societal impact.

SRI is big business in the United States: According to the U.S. SIF Foundation’s 2014 Report on Sustainable and Responsible Investing Trends in the United States, the segment grew more than 76 percent from 2012 to 2014 (most recent data available), increasing from $3.74 trillion under management to approximately $6.6 trillion.

That means approximately one out of every six investment dollars under professional management in the United States today (18% of the $36.8 trillion in total assets tracked by Cerulli Associates) is invested in SRI vehicles that consider ESG issues.

Who are SRI investors?

SRI investors fall into two categories:

• Individuals, from average retail investors to very high net worth individuals and families
• Institutions, such as universities, foundations, pension funds, nonprofit organizations and religious institutions.

Why do individuals and institutions put money into these types of investments? Different people and institutional investors have varying motivations, include investing their money in alignment with:

• personal or organizational values and goals
• the company’s or organization’s mission
• the demands of clients, constituents or plan participants
• contractual or legal requirements.

In the past, SRI investors might have been willing to trade performance for values. However today, they expect strong financial performance and believe the things they invest in should contribute to advancements in environmental, social and governance practices.

Some typical SRI investor profiles include:

• People who actively seek out investments—such as community development loan funds or clean tech portfolios—that are likely to provide important societal or environmental benefits
• Investors who leverage SRI strategies to manage risk and fulfill fiduciary duties
• Those who review ESG criteria to assess the quality of asset managers and the likely resilience of their portfolio companies in dealing with future challenges. These are investors who believe ESG criteria reflect better evaluative standards, which research shows is often the case.
• People who seek financial outperformance over the long term because a growing body of academic research shows a strong link between the impact ESG criteria can have on financial performance.

Types of SRI Investments

Typically, SRI investors focus on one of the following strategies or a combination of both:

1. ESG incorporation. Environmental, community, societal and corporate governance criteria are included in investment analysis and portfolio construction.

2. Active shareholder engagement. People or institutions who own shares in publicly traded companies file shareholder resolutions and practice other forms of shareholder activism to encourage business practices aligned with the SRI values.

Categories developed by the Global Sustainable Investment Alliance (GSIA) expand on these two basic strategies. These categories have emerged as a global standard for SRI investment types.

Here are the SRI investment categories along with examples of different types of investors that could find them attractive and the types of things each might invest in.

• Negative/exclusionary screening: These are funds or portfolios that exclude certain sectors, companies or practices based on specific ESG criteria.
  • Investor/investment example: A hospital that puts their money into mutual funds that don’t invest in tobacco companies.
• Positive/best-in-class screening: Includes funds and portfolios that invest in sectors, companies or projects selected for demonstrating positive ESG attributes relative to peers.
  • Investor/investment example: A religious organization that actively seeks out companies to invest in that demonstrate above average ethical standards.
• Norms-based screening: Managers screen and select investments based on international business standards.
  • Investor/investment example: An investment manager that looks outside of national boundaries to find investment options that demonstrate positive attributes on a global scale.
• Integration of ESG factors: Investment managers actively integrate environmental, social and governance factors into their traditional performance-based analysis of investment opportunities.
  • Investor/investment example: A venture capitalist who wants to earn a significant amount of money while investing in LGBT-owned businesses, which is a cause she is passionate about.
• Sustainability themed investing: Invest in themes or asset types related to different sustainability categories (examples could include clean energy, green technology or sustainable agriculture).
  • Investor/investment example: A property fund that invests in companies that help develop or retrofit residential and commercial buildings to high energy efficiency standards.
• Impact/community investing: Targeted investments, typically made in private markets, aimed at solving social or environmental problems. This can include community-based investing, where capital is specially directed to traditionally underserved individuals or communities, as well as to businesses with clear social or environmental purposes.
  • Investor/investment example: A credit union or community development bank that makes it their mission to invest in startups in their own community.
• Corporate engagement and shareholder action: Shareholders use their power to influence corporate behavior by engaging directly with a company (i.e., communicating with senior management and/or boards of companies), filing or co-filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines.
  • Investor/investment example: Factory workers that fight to improve working conditions at a company their pension fund invests in.

Outside of the GSIA categories outlined above, there are many informal terms used to describe SRI investment types, including:

• community investing
• ethical investing
• green investing
• impact investing
• mission-related investing
• responsible investing
• sustainable investing
• values-based investing
• and many more.

The challenge

Despite the success of the SRI category, or maybe because of it, it’s currently dealing with a problem that’s similar to the one faced by the rapidly growing healthy food industry. So many options are available and so many factors go into evaluating them that people don’t understand exactly what it is they’re buying or what the benefits are. This lack of understanding could hinder future growth prospects.

Healthy food: Does anyone really know what “healthy food” is any more? Is it “organic” or “local” or “low fat” or “high protein” or “pesticide free” or “antibiotic free” or a thousand other categories or descriptors? And who decides?

SRI investments: Do people and organizations really understand how SRI and ESG fit together? Are they clear on the differences between investment types (example: green versus su
stainable)? Do they know who is actually evaluating the investments and what criteria they’re using?

The SRI industry needs to bring greater clarity and transparency to the category before investors lose trust and confidence in it.

The solution

Firms that offer SRI investments need to brand them carefully and develop clear and understandable messaging about them. Good branding and messaging will explain:

• Who the vehicle is suited for
• What it supports (or avoids)
• What makes it different from other options
• Who is evaluating investment options and the criteria that is being used to vet them.

This type of clarity and transparency will help continue to build confidence in the category among SRI investors. This is particularly important because these are people and institutions that truly care about where they invest their money.

Check out this great example of the development of an SRI brand.

Need help developing a brand or message for your SRI offering? Contact Carpenter Group to find out how we can help.