Socially Responsible Investing

Socially responsible investing is commonly defined in the USA as investing that takes into account the social responsibility principles of the investor. By necessity this type of investing requires some consideration of non-financial factors as well as traditional financial factors.

Prior to the development of public stock and bond markets, many private investors took character and responsibility of businesses into account in making their direct investment decisions.  The articulation of a rationale for separation of investment decisions from responsibility assessments emerged in the 19th century Anglo-American culture at approximately the same time as the world’s stock markets grew and professional investment managers emerged.

During this era, there were numerous institutional investors (such as Quakers) who maintained their own investment policies and effectively screened out investments that benefited directly from the slave trade. Other investors (principally churches in the USA) excluded alcohol from consideration.

This type of “socially responsible” investing is often called negative screening since it involves eliminating industries that are considered undesirable or “bad” from consideration as candidate investments for a person, institution, or fund. Negative screening is the dominant form of social investing practiced in the USA and accounts for the vast bulk of the assets ($2.03 trillion out of $2.30 trillion total invested by social investment managers, according to the Social Investment Forum.

For more general information on social investing in the USA, you can visit the Social Investment Forum at www.socialinvest.com.

In European countries such as Germany, labor organizations exerted power at public companies directly through their role on managing boards. This model was rarely used in the United States until quite recently as airlines facing bankruptcy were required to provide board seats to labor representatives in return for salary concessions.

Beginning in the 1970s, the Interfaith Center for Corporate Responsibility (ICCR) pioneered the use of the shareholder resolutions as a means for engaging companies in dialogue on public policy issues such as labor conditions, environmental and community impacts.  ICCR and its affiliates used the corporate governance rules and the proxy-voting process to raise a broad set of issues directly to companies. To avoid confrontations, many public companies negotiate with shareholder activists and agree to issue reports or change some of their practices.

In the 1980s, activists concerned about the apartheid system in South Africa began a campaign to exert pressure on companies through attempts to get institutional investors to divest stock in companies that did business directly in South Africa. Beginning with the District of Columbia, many public pension funds developed such policies, and armed with information from the Investor Responsibility Research Center (www.irrc.org) on which companies had operations in South Africa, began requiring and investing in “South Africa-free” funds.  While there was significant debate over the impact (if any) of these divestment activities to South Africans and the global companies that operated there, Nelson Mandela and other leaders of democratic South Africa have acknowledged their role when he called for lifting the sanctions on South African investment in 1993.

Few of the public South Africa-free funds outperformed their investment benchmarks during their existence. Perhaps as a result, the majority of institutional investment professionals do not recommend socially responsible investing and most believe that negative screening restricts investment opportunities and therefore leads to diminished returns. Put another way, there is an inevitable cost associated with the privilege of feeling “more moral.”

In the 1990s, Harvard Business School professor Michael Porter suggested that better corporate performance in one area of social concern, the environment, could actually enhance corporate “competitiveness.”  Organizations such as IRRC, Vanderbilt, Michigan, Duke, and others published empirical studies that demonstrated a financial advantage obtained by companies that had better environmental performance than others in their industry.

For more information on the path breaking research upon which best of class investing is based, click here to go the RESEARCH section that summarizes 40 important studies.

For more information on how LGA’s investment philosophy is built upon this “best of class” research base, visit INVESTMENT PHILOSOPHY

From this research, a new type of social investment strategy was borne: “best of class” environmental investing or “sustainability investing.” While the field is still relatively new, LGA products have performed better than their benchmarks and disproved the notion that there is inevitably a cost to a “cleaner portfolio.”

For more information on distinctions between conventional negative screening and LGA’s approach to “best of class” investing, visit THE LGA DIFFERENCE.

For information on the financial performance of LGA products versus industry standard benchmarks, visit FINANCIAL PERFORMANCE.

Caveat Emptor (Let the buyer beware)

Since all investors, even social and environmental investors, do not share the same values, the Wall Street Journal and other observers note that there are significant differences between the holdings of various socially “responsible” investment managers. At LGA, we believe that it is vital for investors to understand both the nature of the values the investor hopes the manager will respect and also the nature of the financial strategies that result from social investment manager decisions. Please read the LGA DIFFERENCE to understand the key differences between LGA’s investment strategy and classical social investing strategies.