Socially responsible investing is striving to make business better

Mar 04, 2019
As the Internet and social media have driven rapid and easy access to information, people around the world are increasingly demanding better behavior from the companies they do business with. Investors have felt the pressure as well and are responding by investing more capital using an approach known as socially responsible investing (SRI).

Never heard of it? If you’ve ever heard the terms “social finance,” “sustainable investing,” “ethical investing,” “values investing,” or “impact investing,” then you’ve heard of socially responsible investing. They all fall under the same umbrella, although some, like impact investing, are specific strategies in their own right.

Learn more about socially responsible investing and how you can get involved.
 
  1. What is socially responsible investing?
  2. What is ESG?
  3. How is socially responsible investing being used?
  4. How big is the market for socially responsible investing?
  5. Does socially responsible investing mean lower profits for investors?
  6. Who invests using socially responsible investing?
  7. How much money do I need to invest using socially responsible investing?
  8. Where can I find a list of investments I can make using socially responsible investing?
  9. Where can I learn more about socially responsible investing?
  10. How is World Vision applying the principles of socially responsible investing?
  11. How can I get involved with socially responsible investing and help children at the same time?

1. What is socially responsible investing?
Socially responsible investing (SRI) is an approach to investment that considers not only financial return in allocating money, but also the impact of that investment according to social, environmental and governance criteria such as whether women are in leadership positions, food security, the reduction of greenhouse gas emissions or corruption, to name a few.

2. What is ESG?
ESG stands for Environmental, Social and (corporate) Governance, and refers to the factors considered in socially responsible investing. They measure the sustainability and ethical impact of a given investment as a way of figuring out risk and future financial return.

A woman entrepreneur and two women wearing aprons and hairnets in Chillaw, Sri Lanka, manufacture orange-coloured noodles in large, round silver pans - socially responsible investment projectSupported by socially responsible investment through World Vision Canada, workers at a small manufacturing facility in Chillaw, Sri Lanka, prepare snack food noodles. Photo: World Vision Canada

3. How is socially responsible investing being used?
Investments made using SRI can use any instruments found in traditional investing since SRI is an investment approach rather than a tool in itself. SRI can be applied to ETFs (exchange traded funds), mutual funds, real estate investments, private equity, bonds and stocks.

The earliest, well-known example of SRI is anti-apartheid divestment in South Africa and fossil-fuel divestment (a type of “negative screening”), which saw a surge in interest during the 1980s and was mostly driven by university and college students. Thirty years later there are numerous options in Canada for investing responsibly and the government of Canada is now directly participating via a new $800 million social finance fund.

SRI can be applied to any investment class, running the gamut from green bonds issued by the European Investment Bank to exchange traded funds of every kind (clean tech, social and corporate governance, low carbon, etc.), to startups like student loan operator Sixup.

SRI is composed of four strategies:

Negative screening: Investments that don’t meet the desired standard receive no funds. This is similar to the movement that led to many companies divesting from South Africa in the 1980s in reaction to apartheid.

Positive screening: Investments made to reward or boost specific behaviour and outcomes. Impact investing, a sub-type of SRI, falls under this category.

Community investing: Typically loans made to people, small businesses and organizations that might otherwise have trouble accessing capital and that help provide needed services like housing, education or access to other basic necessities like water. World Vision’s own Small and Growing Business Bond Fund falls under this category.

Shareholder action: Company shareholders pass resolutions that make proposals for how management should run the business. This can be a significant tool for shaping corporate behaviour.

Four women wearing skirts and blue shirts harvest sandriyana by hand in Dambulla, Sri Lanka
Field workers in Dambulla, Sri Lanka harvest sandriyana. This business is supported by socially responsible investment through World Vision Canada. Photo: World Vision Canada

4. How big is the market for socially responsible investing?
Socially responsible investing has at its core an explicit commitment to factor in non-financial considerations—environmental, social and governance—while seeking to earn a return on investment.

Worldwide investment under SRI topped US$29.2 trillion in 2016. Canada’s participation is modest but growing and, while estimates vary, hit $2.1 trillion in 2017, up from $517 billion in 2010. It may be a small part of the global pie but Canada is arguably punching above its weight as SRI represents 50.6% of the country’s investment industry, up from 37.8% in 2015.

5. Does socially responsible investing mean lower profits for investors?
There have been numerous studies done over the last 20 years on the performance of SRI, addressing the perception that investors necessarily give up better financial returns in exchange for doing good. The findings suggest that SRI compares favorably to (and often better than) traditional investing. As summarized by investment research firm Morningstar:
  • Sustainable/responsible funds and indexes perform on par with comparable conventional funds and indexes
  • Companies with higher environmental, social, and governance scores and ratings can outperform comparable firms in both accounting terms and stock market terms
  • A focus on company-level ESG factors rather than exclusionary screening can lead to better risk-adjusted performance at the portfolio level
The oldest SRI index, the MSCI-KLD 400, which launched in 1990 in the US, has “consistently outperformed” its counterpart, the S&P 500. On the other side of the pond, the LFR Euro Développement Durable fund has grown by 45.3% since 2009, which is comparable to the Euro Stoxx 50 fund (comprising the 50 largest stocks in the Eurozone).

6. Who invests using socially responsible investing?
Every kind of investor, from individuals to institutions. However, the driving force behind the rise of SRI is primarily attributed to millennials and women. Research shows millennials are consistently more likely than any other demographic to not only be the most interested in SRI, but also the most likely to invest accordingly.

Husband and wife business owners smile at the cameraThis husband and wife team are entrepreneurs in Chillaw, Sri Lanka. They run a food manufacturing business that has been assisted by Origin Capital, World Vision Canada’s financial investment arm. Photo: World Vision Canada

It doesn’t hurt that heavyweight bankers and financiers, including Michael Bloomberg, Larry Fink (CEO, BlackRock) and Mark Carney (former Bank of Canada governor and now Bank of England governor) have all come out in favour of CEOs and fund managers using an SRI approach.

Institutional investors in Canada are increasingly focused on SRI with 91% of them reporting in 2018 that they have changed their “voting and/or engagement policy to be more attentive to ESG [environmental, social and governmental] risks.”

Because women’s share of the wealth pie is growing, their financial and decision-making independence is also growing. According to Boston Consulting Group, private wealth held by women has risen to US$51 trillion in 2015 from US$34 trillion in 2010, and is projected to hit US$72 trillion by 2020 or 32 per cent of the total. And while there is variation from country to country, surveys indicate that in general women are more likely than men to consider positive impact or want their investment advisors to be knowledgeable about it.

7. How much money do I need to invest using socially responsible investing?
That depends on the instrument you’re using to invest. This could be anything from a few shares of company stock at $5 each, to a mutual fund which is a collection of stocks, to a $100 bond, to a multi-million-dollar investment in a startup.

8. Where can I find a list of investments I can make using socially responsible investing?
Visit the Responsible Investment Association of Canada’s marketplace.

9. Where can I learn more about socially responsible investing?
Today, all major banks and many investment firms offer SRI investment options and the information to go with it. For an overview, start at the Responsible Investment Association of Canada.

10. How is World Vision using socially responsible investing?
SRI has the potential to be transformative in the developing world. World Vision Canada is active with SRI through Origin Capital—home to the Origin Capital Small and Growing Business Bond, Origin Capital Venture Fund and Origin Capital Social Innovation Challenge—which is dedicated to fulfilling World Vision's mission of changing the lives of children and their communities for the better.

“People are starting to make the connection that where you put your money matters and is driving how our world is going to develop, how people’s wealth develops—if we’re going to get people out of poverty, if we’re ever going to fight climate change. And when they do make that realization they’re starting to say, ‘What are my alternatives?’ And right now the alternative is SRI,” says Mathu Jeyaloganathan, lead, Origin Capital Venture Fund, for World Vision Canada,

11. How can I get involved with socially responsible investing and help children at the same time?
The first step is to get educated about what SRI is and what your options are. You can also contact World Vision Canada for more information.

While a given investment managed according to SRI may focus on any number of areas, World Vision’s involvement in SRI through Origin Capital specifically targets vulnerable children and their communities.

With an investment in, donation to, or partnership with Origin Capital, investors are able to help vulnerable children in the 46 countries where World Vision Canada operates. Contact our professional investment managers if you would like to learn more.