For many years, sustainability-minded investors were lumped into a single narrow category. They were thought to practice “socially responsible investing” (SRI), which meant that they used their money to drive positive social change. It was also thought that they sacrificed returns in order to do so – the tradeoff for doing well, in this context, was making less.
In reality, that was never completely true. Many SRI practitioners were just as interested in environmental and governance performance metrics as social ones, and they did not accept the fact that a market (or better) return was impossible. But the myth persisted, unfairly coloring the SRI movement as a fringe part of the investment community. It would never be mainstream, attract retail investors, or deliver significant returns.
But, as the man once said, things change. A series of financial scandals, and near economic collapse, brought greater scrutiny to corporate governance controls. The environmental crisis became more commonly known and accepted. The connected and globalized workplace brought with it a series of social challenges. Investors looking for an analytic edge, true insight into the operational excellence of a company, now had to look well beyond the balance sheet. So they focused on “non-financial” performance metrics, the ESG (environmental, social, and governance) indicators.
As to whether the sustainability investing movement is sufficiently mainstream, consider the numbers: More than $7T in assets, accounting for more than one out of every six dollars under professional management in the United States1.
Whether these worlds (SRI, ESG, Impact Investing, Values-Based Investing) happened to converge, or simply evolved into a broader understanding of the responsibilities of a smart investor, doesn’t really matter. This is an era of integrated thinking in the investment space. Sources of alpha (and avenues of return) are harder to find, so investors look farther afield.
A new research paper from Nasdaq Corporate Solutions makes this point clear. Do Well, Do Good, Do Both:Socially Responsible Investing & Environmental, Social and Corporate Governance in the Era of Shareholder Engagement, published by the Board & Leadership team, argues that the evolution of investing in this space has led to a new era of shareholder activism and new practices in board engagement.
Here are a few key themes highlighted in the paper:
- Whether the issue is say-on-pay, proxy access, or socially and environmentally responsible investing, shareholders expect access to the board that now goes well beyond the annual meeting.
- The board should not view these as add-ons, but as core business issues they need to hold management accountable for.
- In order to navigate the complexities of ESG, boards must rely on process and transparency—and communicate with stakeholders more proactively.
 Investment News, Socially responsible investing is coming of age, March 2016.
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