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Social Responsible Investing (SRI)  is an investment discipline that considers environmental, social, and corporate governance (ESG) criteria alongside other industry metrics to generate long-term results with positive social impact. ESG ratings are published by several companies, with MSCI and Sustainalytics two of the largest US-based providers. There has been a long-held belief that ESG screening  requires a tradeoff with lower (or negative) financial returns. SRI investors have shown that  companies with higher ESG scores use their resources more efficiently, have less exposure to litigation, better standing in public opinion, and happier and more productive employees. These elements benefit long-term investment and these companies have steadily met or exceeded their lower-scoring peers.

There are two basic approaches to SRI:

Negative screening: This strategy began with restricting investment in companies that earn revenue on products such as firearms, alcohol, tobacco, or adult products (aka “sin” stocks), and have recently expanded to include oil and gas companies. Negative screening is the most commonly used criteria but can have mixed results against benchmarks. ESG scores capture some elements such as diversity on the board of directors and within the company’s senior management, as well as the social and environmental impacts of the business, however they do not capture management decisions, product development, or factor in offsite manufacturing (particularly for “green” technology companies that have other companies make their products in other countries).

Positive screening: Investors wanting to invest in companies that align with specific goals or values, such as renewable energy, clean-tech, affordable housing, or energy efficiency, may use the more active approach of positive screening. They may look at a broader range of factors that may not be easily accessible, but this extra effort can have a higher rate of return against benchmarks. Positive screening may also include direct investment in projects with private equity, such as building a community solar for an underserved population.

SRI and impact investing have deep roots, but this investment strategy has only recently moved beyond a niche space into the broader market. According to US SIF Foundation’s 2016 Report on Sustainable and Responsible Investing Trends in the United States, more than 1 out of 5 dollars under professional management in the US is invested according to SRI strategies; that is $8.72 trillion and growing. “I think we’re at the end of the beginning,” said John Streur, president and chief executive of Calvert Investments, Inc., who was quoted in a Wall Street Journal article about the recent enchantment with this previously overlooked strategy. 2015 saw the development of SRI and ESG products at some of the largest banks, asset managers, and private equity firms, notably Black Rock, JPMorgan and Goldman Sachs. They are not merely jumping onto the “green” gold rush, they are responding to consumer demand for investments that not only deliver returns but do so with social impact.

Many institutional investors, including pensions, have historically leveraged SRI strategies to fulfill fiduciary duties or for risk management, but a growing number of private investors want their money to grow by investing in companies or projects that take ESG measurements seriously. A growing demand is coming from Millennials (people born between the early 1980s and mid-1990s). “It’s a huge nod to the times,” Mr. Katchen, the CEO of Wealthsimple Inc, said in the Globe and Mail. “Young professionals not only want to make money on their money but have their investments aligned with their values.” His company added SRI exchange-traded funds in 2016 to cater to client requests, about 85 percent of whom are under the age of 45.

This large and diverse group of young adults is a perfect audience for SRI. This generation, who came of age during the fallout and austerity of the Great Recession, is forgoing the status cars, homes and high-pressure jobs of their Baby Boomer parents in exchange for experiences. They are pioneering the technology-driven version of the shared economy with car sharing, apartment living, and the gig economy. They are taking the same approach with their portfolios favoring companies that share their values. Asset managers should be looking to include products that appeal to this demographic. A 2016 report released by Accenture noted that Millennials make up close to half of the workforce in North America and are expected to inherit more than  $30 trillion in the coming decades. That is a lot of capital to be invested according to their terms. Public companies should also take note that their ESG scores are going to be increasingly important to shareholders.

Photo Credit: David L. Ryan, The Boston Globe

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