Socially Responsible Investing

Watch your savings grow and feel good about it

Socially Responsible Investing (SRI), traditionally a niche sector, has become mainstream. Open any newspaper and the chances are you will find an item on issues such as climate change, fresh- water scarcity or corporate scandal. As concerns about climate change and human rights grow, SRIs are a useful option for investors who do not want their savings invested in companies whose policies they disapprove of. This month, IFG Asia investment advisor Joseph J Dwyer sheds light on investing your money in socially responsible ways.

KS: What is Socially Responsible Investing?

JD: Everyone has different social issues that are important to them and their own ideals on what is socially responsible. How- ever, it is commonly agreed that "SRI is an investment process that considers the social and environmental consequences of investment, both positive and negative, within the context of rigorous financial analyses".

Is Socially Responsible Investing a new concept?

Socially Responsible Investing has a long history, but has emerged as an important issue in the last twenty years. In biblical times, Hebrew laws laid down directives on how to invest according to ethical values. In the US, Quakers practiced socially responsible investing as early as the 16th century, based on their beliefs in human equality and non-violence. More recently, the social cli- mate of the 1960s raised concerns among some investors about civil rights, the environment, and militarism. However, the turning point for socially responsible investors came during the campaign to eliminate the institutionalized racial discrimination of apartheid in South Africa. Today there is a plethora of environmental and social concerns for socially responsible investors to consider.

How is SRI applied in practice?

Typically there is a three-stage process in choosing a Socially Responsible Investment:
1. Determining if SRI is significant to you.
2. Establishing which issues - ethical, social or environmental - are important to you.
3. Deciding which ethical strategies to use: support, avoid or engage.

What is the first stage?

One must first ask the question "Would I like any social, ethical or environmental issues to be taken into account when looking at my investment portfolio?"

What are the main issues to look at when choosing an SRI?

It is important to identify your main areas of focus since opinions on social, environmental and ethical issues vary. Some social, environment and ethical issues to consider are:

Social
• Access to Medicines • Bribery & Corruption
• Child Labour • Community Giving
• Community Initiatives • Conflict • Corporate Governance
• Equal Opportunities • Health & Safety • Human Rights
• Labour Standards • Supply Chain Management

Environmental
• Air & Water Pollution • Biodiversity • Climate Change
• Energy • Environmental Management • Mining & Quarrying
• Nuclear Power • Ozone-Depleting Chemicals • Pesticides
• Transport • Tropical Hardwood
• Waste & Toxic Che- mical Management • Water Management

Ethical
• Alcohol • Animal Testing & Fur • Gambling
• Genetic Engineering • Human Rights • Military
• Nuclear Power • Pornography & Adult Entertainment
• Repressive Regimes • Tobacco

What are the investment strategies employed in choosing a Socially Responsible Investment?

Broadly speaking there are three approaches to Socially Responsible Investment that can be combined in different ways: Support: Also known as positive screening, support seeks to invest in those companies with a commitment to responsible business practices, positive products and/or services. This approach can come in a number of forms, including, best of sector, thematic investment (such as investing in environmental technologies) or investing in companies providing basic human necessities.
Avoidance: Also known as negative screening, avoidance is the most commonly recognized from of responsible investment. Avoidance means not investing in companies that do not meet the ethical standards by which the fund or investment is run. Most ethical funds, for example, will not invest in tobacco companies.
Engagement: Also known as ‘shareholder activism', engagement is applied by some fund managers to encourage more responsible business practices. It relies on the influence of investors and the rights of ownership. Corporate scandals such as the Enron and WorldCom collapses and the more recent problem of stock option backdating have led to increased corporate governance and shareholder activism.

What about Risk?

It is important to understand the risk/volatility associated with any investment, including SRIs. Are these assets necessarily riskier than other "non ethical" funds? One may argue that the answer is yes due to the defined scope of these investments and the limitation on stock choices. The question of "how green?" will also limit your choice. For example, if you have a very strong negative screening approach, this will exclude investments that others may choose. Therefore you may be limited to sector specific investments that may carry higher volatility. If however, one takes care with asset allocation, a portfolio including SRIs need not carry more risk than a traditional portfolio.

Will SRI affect the performance of my portfolio?

Research has shown that SRI funds have kept pace with the per- formance of other funds. Lipper data shows that year to date, SRI funds have returned 11.66 percent compared to the fund industry average of 11.27 percent. The Dow Jones Sustainability Index that comprises of leading companies in terms of sustainabi- lity around the world has achieved 158.70 percent return of the past five years compared to the MSCI world of 141.45 percent.

Can SRI be applied to asset classes other than equities?

There is no reason why SRI cannot be applied to any asset class, although the majority of investment activity in the SRI sector to date has focused on equity investments, ie, companies with a good track record on social/environmental issues. SRI is beginning to be applied to private equity and venture capital investments, and a small number of SRI products focussing on fixed interest have begun to emerge. Property investments also lend themselves to SRI screening, such as eco housing developments and energy efficient buildings.

What types of funds are available to people living here in Japan?

There is a wide choice of Socially Responsible Investments avail- able with the selection increasing, particularly in the sector of alternative energy and other funds focusing on alternatives to oil. Some sectors of Socially Responsible Investments currently avai- lable are Ecology Funds, Climate Change Funds, Social Funds and New Energy Funds, all of which are available by leading fund managers. As with choosing any investment, it is important that investors consider what is appropriate in their individual circumstances.

Text: Laura Markslag