Keeping the SRI in ESG
Big changes are underway in the world of socially responsible investing (SRI). In just the past five or so years, mainstream Wall Street has reversed course from its longstanding claim that SRI can only hurt financial returns, to embrace the idea that environmental and social issues can have a direct impact on financial performance.
The Wall Street shops are defining their approach as “sustainability” or “ESG” (environment, social and governance) investing. Goldman Sachs recently launched GS Sustain, as “a unique global equity strategy that brings together ESG criteria, broad industry analysis and return on capital to identify long-term investment opportunities.” Mercer, one of the world’s largest investment consultants, built its global Responsible Investment team to “integrate ESG considerations into investment management processes in the belief that these factors can have an impact on financial performance.” UBS has integrated sustainability themes into both its Wealth Management and Global Research divisions, launching products like the UBS Eco Performance equity fund. The former head of Goldman Sachs joined forces with Al Gore to form Generation Investment Management, a firm founded with “an investment approach based on the idea that sustainability factors – economic, environmental, social and governance criteria – will drive a company’s returns over the long term.” No doubt, the current tumultuous market has presented some bumps in the road for some of the firms involved, but almost certainly the theme of sustainability investing is here to stay.
This is all very positive news for the investment community at large and indeed the planet. These ideas – that people and the environment matter to profits – are just what we’ve been advocating for years! What’s really exciting is there are now more resources and depth to ESG research than we’ve ever had access to before.
But this mainstreaming of sustainability investing also presents something of a threat to longtime SRI practitioners. The new sustainability shops have worked hard to differentiate themselves from traditional SRI – that is, us. The claim is that the new ESG approach improves upon traditional SRI in that it is forward-looking and focused on uncovering investment opportunities in a more sustainable world, without being hampered by negative screening and without taking on controversial shareholder advocacy.
The fact is, forward-looking ESG research is far from new to us. SRI practitioners have been researching and incorporating sustainability concepts into our investment practices for years. For nearly three decades, our research has been focused on the intersections between ESG issues and financial performance – we just didn’t call it that. As we see it, SRI firms have really been providing what could be called “ESG Plus” – adding client-tailored screening, change-making advocacy and high impact community investing on top of our sustainability-focused investment methodology. These “plus factors” are essential to our approach, and for the long-term, we remain committed to keeping the SRI in ESG.
But as the world of financial services restructures, it may be the opportune time for traditional SRI firms to collaborate with Wall Street’s new sustainability initiatives on the ESG mission we have in common. Our experience, dedication and long-term perspective on issues like climate change, water scarcity, poverty, and executive pay, combined with the larger firms’ deep research capabilities and resources could be a powerful force. Indeed, at what may turn out to be a critical inflection point in history, by working together the investment community could play a critical role in defining the path to sustainability.