The landscape is changing for so-called responsible investing, and governing boards must adjust their strategies accordingly to gain a competitive advantage, according to a new report from the Commonfund Institute.
“Responsible investing” is the collective term given to three major categories of investing: socially responsible investing, or SRI; environmental, social, and governance investing, or ESG; and mission-related or impact investing. The combined responsible-investing market was worth some $3.74-trillion last year, an 11.2-percent share of the $33.3-trillion in total assets under management in the United States.
There is “a growing recognition that certain environmental, social, and governance issues not captured by traditional investment analysis can prove material to investment performance,” the report says. “Studies identify issues such as energy efficiency, carbon emissions, toxic-waste treatment, workplace safety, employee relations, and corporate governance as materially affecting traditional financial indicators such as price/earnings ratio and reputation with investors.”
Practitioners of responsible investing, the report says, have moved away from simply excluding certain types of investments for ethical reasons and instead try to encourage more positive behaviors by portfolio companies. “Negative screening,” the name for the exclusionary approach, can be useful to institutions that wish to express “ethical, religious, or moral values through their portfolio,” the report says, but socially responsible investing, when practiced narrowly, can limit the range of securities available for investment and thus prove too restrictive.
Responsible investing need not be an “all or nothing decision,” the report says. “Rather, a sliding scale of engagement is available” for institutions looking to invest in this market.
The Commonfund Institute collaborates with the National Association of College and University Business Officers on the annual Nacubo-Commonfund Study of Endowments.