What’s Driving Sustainable and Responsible Investment?
An increasing number of investors are putting their money where their morals are, investing in companies that include environmental, social and corporate governance (ESG) criteria among their enduring principles. Over the past decade, investors showed tremendous interest in sustainable and responsible investments (SRI). For example, U.S. based SRI assets, under professional management has grown from $639 billion in 1995 to over $3.7 trillion in 2012, a compounded annual growth rate of 11 percent. According to the Forum for Sustainable and Responsible Investment, more than one out of every nine investment dollars in the U.S. is invested according to SRI methods. As a result, ESG criteria is promoting sustainable financial returns and positive societal change. What’s driving this shift to SRI?
SRI Drivers and Trends
In the last decade, the drivers and growth of SRI within the United States has been created by many enduring trends:
- Shift to Sustainable Long-Term Value Creation. There has been a shift over the last two decades in the motivations of consumers and investors. In the past, motives for SRI may have been largely based in moral or religious beliefs. For instance, tobacco may have been viewed as morally objectionable and thus omitted from investment funds. Today, motives are driven by a focus on risks to sustainable long-term value creation. A great example of this trend, tobacco is now viewed as not only morally objectionable, but also as a risky investment due to increased regulation and medical education around the world. The shift to incorporating SRI into risk management metrics will continue to be an important driver of SRI investments.
- Access to Information. Globalization and increased access to information has forced investors to re-evaluate investment strategies over the past decade. Because of increased global access to information, countries with unstable governments easily stand out to investors. Consider the case of oppressive regimes. Because of the news surrounding the oppressive regime in Sudan, investment firms have divested from exposure to the country in an effort to mitigate financial risk. By proactively managing and screening investments using SRI and ESG criteria, firms can limit future dollar losses while avoiding future risks to its brand. Best of all, these actions force enduring societal change.
- Corporate Accounting Reforms. Last decade’s corporate accounting scandals and the recent financial crisis increased investors’ focus on corporate governance and financial accountability. The investment community now demands greater accountability — resulting in tighter financial and accounting standards in public companies (namely, through the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010). Increasingly, corporate investors focus on those companies that incorporate ESG policies and have a strong track record of corporate social responsibility (CSR).
The Future of SRI
Economies around the globe are still recovering from the lasting effects of the financial crisis and face many challenges in the coming years: high unemployment, rising income inequality, polarized legislatures, climate change and continued concern of financial stability. Amidst this backdrop, socially responsible investing is a bright spot, driving sustainable economies while shaping positive societal change. As world economies continue to become increasingly interconnected, sustainable financial returns with environmental, social and corporate governance criteria will lead the way.
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