By Anthony Rubinich
The opening to the 21st Century has been wrought with one huge corporate scandal after another. From Enron to Madoff, it appears as though good faith and ethical values are hard to come by in a world of suits. However, in light of these scandals, many people have taken to a new stratagem of investing that hopes to generate both high financial returns and progressive changes. According to the Forum for Sustainable and Responsible Investing, “sustainable, responsible and impact (SRI) investing is an investment discipline that considers environmental, social, and corporate governance to generate long-term and competitive financial returns and positive societal impact.” Social responsibility investing or “green” investing offers an alternative to investors who want to see their money be put to good use.
Recent data suggests that “green investing” is becoming more and more popular. In 2013, $6.57 trillion in total assets were generated using SRI investments. Between 2012 and 2014, SRI practices grew at a rate of 76%. Moreover, SRI investing has become noticeably popular among mutual funds. The number of mutual funds that practiced green investing rose from 333 to 456. In addition, their collective assets increased from $641 billion to $1.93 trillion. In percentiles, an increase of over 260%.
Historically, SRI funds have been involved with three categories of issues: (E) environmental, (S) social, and (G) governance. Some environmental topics that ESG funds try to take on include climate change, pollution, energy efficiency, and deforestation. Other firms try and set above average social standards by taking into account diversity, human rights, labor standards, and corporate-community relations. Lastly, governance is the act of managing or controlling. Issues that firms have dealt with relating to governance include: board member composition, corruption, and lobbying activities.
Individuals may choose to invest in a mutual fund whose primary interest is finding companies with good labor and environmental practices. Hospitals and Medical schools will refuse to invest in tobacco or alcohol companies. Religious institutions may not invest in companies whose actions go against their beliefs like stem cell research. Venture capitalists may only work with companies that comply with above-average labor standards or seek to help the environment in one way or another.
One SRI mutual fund is the Appleseed Fund. Launched in 2006, Appleseed seeks to invest in companies that are conscious of their environmental and societal impact.The fund will not invest in companies that derive substantial revenues from tobacco, alcohol, pornography, gambling, or weapons industries. Appleseed will also consider a company’s performance with respect to environmental responsibility, labor standards, and human rights.
Here is a link to their website:
The rationale behind green investing has developed from age-old ethical beliefs. Speaking as student from a Jesuit University, I’ve been beat over the head with philosophy and ethics. Everything from Socrates to Kant, and from Hobbes to John Stuart Mill. While I may not have enjoyed taking these classes, it’s interesting to see the ethical concepts we studied emerge in everyday life.
The very concept of green investing directly correlates to corporate social responsibility. CSR- the steps a company takes to assess and regulate its effect on the environment and social well-being. For those who practice the CSR there is a triple bottom line:
“The obligation to work for social betterment is the essence of the notion of corporate social responsibility,” says modern day ethicist, William C. Frederick.
Still, no practice comes without flaw, and social responsibility investing is no exception. Here are its pros and cons. Pros. Green Investing allows environmentalists, political activists and health advocates a chance to talk with their money. By investing in companies that are congruent with your beliefs, you are in layman’s terms, “putting your money where your mouth is.” In addition, you are rewarding, shall we say, “right-minded” companies.
The cons. Your investing in a company that promotes clean environment protocols may not result in a high return rate. There is little evidence to suggest that “responsible” firms produce high rewards. By choosing a green fund, you could very well be denying a good, high reward investment. In addition, SRI funds have historically under-performed their contemporaries. Furthermore, how do you measure someone’s ethics? The crux is that companies may appear socially responsible, but may turn the other cheek when the spotlights off.
Morningstar’s Sustainability Rating System can be used to evaluate how well a company is managing there ESG factors. To evaluate companies, Morningstar utilizes an intricate rating system that rates companies on a scale of 1 to 5 stars. The bottom 10% of companies receive 1 star, while the top 10% receive 5.
An example of a fund with a five star rating is Janus Enterprise Fund Class I (JMGRX). Janus prides itself on addressing ESG-related issues, in particular energy efficiency. Janus encourages their clients to invest in a strategy that appeals to their personal beliefs. Perhaps Janus’ most attractive facet is its consideration of global affairs and recognition of socio-economic trends. On the other side of the coin, T. Rowe Price New America Growth Fund Advisor Class (PAWAX) was given a rating of one star.
Social responsibility investing is a sustainable investment strategy that adheres to the tenets of ethical thinking. The practice is concurrent with corporate social responsibility. However, it begs the question, how altruistic can a company be? Some corporations struggle when they have to choose between making a profit and doing the right thing.
Furthermore, how altruistic can you be with your money? Are you investing to make a profit or to help society? History has shown us time and time again that investors, entrepreneurs, and inventors could combine their materialistic desires with good faith. With all the controversies and seemingly lack of ethics on Wall Street, rewarding companies that “follow the rules” should be of the utmost importance.