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GreenMoney Journal - publishing since 1992
Fall 2010 issue
Socially Responsible Investing – Better Companies, Better Communities
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THE FUTURE OF SOCIALLY RESPONSIBLE INVESTING
JON NAIMON
Ten years from now "socially responsible investing" (SRI) will be a more accepted part of the
lexicon of financial services professionals. However, the characteristics and impact will change
significantly from its current status as a "rebellious teenager." By 2012, we expect to see a more
mature, professional, and specialized SRI world. The driving forces behind these changes are the
increasing sophistication of investors and the continual improvement of quantitative techniques.
We anticipate three types of changes in SRI over the next ten years. First, SRI
will come to embody a wider variety of social preferences better reflecting the diversity of
investor values. Second, a new generation of SRI products will use quantitative tools widely
disdained by many of today's SRI practitioners. And finally, the impact of SRI on the operation of
companies will be significantly greater as SRI emerges from the rhetorical closet to actively
engage companies in pragmatic dialogues and to guide companies seeking better valuations.
Today, two distinct cultural groups dominate SRI: the "cultural creatives" (with secular
humanist values) and the "new traditionalists" (with religious values). New issues such as cloning
and animal experimentation will continue to delineate the real differences that exist between these
responsible investing values and SRI asset managers. As a result, neither "liberals" nor
"conservatives" will dominate SRI by 2012.
Just as traditional political party politics
is receding in importance relative to special interest group politics, we expect the SRI tree will
grow new branches, each with its own ideology and funds. An important example of this is the
development of animal welfare funds that have radically different investment profiles than
traditional SRI funds that view pharmaceutical companies as desirable investments promoting human
health.
The upshot of this is that SRI managers, even negative avoidance screeners
and traditional shareholder advocates, will increasingly have to compete with with new specialist
managers in specific areas like the environment.
The second revolution relates to the
processes by which SRI managers define and manage portfolios. The current two step process,
defining an investment universe of SRI names and then constructing a portfolio afterwards, betrays
the fact that the SRI analysis is not an integral part of the financial analysis for most SRI
managers - yet.
Leveraging 25 years of computer progress, a host of powerful
quantitative tools have revolutionized non-SRI investing and account for an ever-increasing part of
the securities market. At Light Green Advisors we have developed quantitative
(Eco-MetricTM) tools to enable us to weave environmental and financial factors together
into a unified portfolio management framework. We believe that other SRU firms will increasingly
adopt or adapt many of the new quantitative methodology tools that have been used by mainstream and
institutional investors for a decade. By 2010, we expect at least a dozen other managers to use
such tools.
One example of this can be found in the principal-protected Global Eco
Bonds! that LGA and European Financial Group Private Bank have developed for European institutional
investors. These notes allow investors to make a long term bet on sustainable companies but avoid
the downside risk that normally accompanies equity investments in companies traded in different
markets.
The final area of change we expect to see, and are beginning to see, is a change
in corporate behavior. It doesn't take a rocket scientist to recognize that the investor relations
and public relations professionals who respond to shareholder resolutions are not responsible for
new product introductions at most companies. As managers of SRI products (not necessarily from the
traditional SRI community) begin to address corporate responsibility in more quantitative terms, we
expect to see companies respond to social responsibility concerns in ways that are quantitatively
significant. We have been telling companies that donations to NGOs and environmental disclosure
policies are no longer enough.
These three dynamics can multiply the impact of
social investors on corporate behavior several-fold. However, the popular illusion of a single
social movement of social investors will slowly evaporate. We are optimistic that these changes
will also permit a new set of concerned investors to increase the likelihood that they will achieve
their financial objectives in an increasingly volatile, post-bubble, 21st century market.
Article by Jon Naimon, President, Light Green Advisors.
For more information go to -
http://www.lightgreen.com
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