What is sustainable, responsible and impact investing?
Sustainable, responsible and impact investing (SRI) is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.
SRI Assets in the United States: According to the US SIF Foundation’s 2014 Report on Sustainable and Responsible Investing Trends in the United States, as of year-end 2013, more than one out of every six dollars under professional management in the United States—$6.57 trillion or more—was invested according to SRI strategies.
Motivations: There are several motivations for sustainable, responsible and impact investing, including personal values and goals, institutional mission, and the demands of clients, constituents or plan participants. Sustainable investors aim for strong financial performance, but also believe that these investments should be used to contribute to advancements in social, environmental and governance practices. They may actively seek out investments—such as community development loan funds or clean tech portfolios—that are likely to provide important societal or environmental benefits. Some investors embrace SRI strategies to manage risk and fulfill fiduciary duties; they review ESG criteria to assess the quality of management and the likely resilience of their portfolio companies in dealing with future challenges. Some are seeking financial outperformance over the long term; a growing body of academic research shows a strong link between ESG and financial performance.
Terminology: Just as there is no single approach to SRI, there is no single term to describe it. Depending on their emphasis, investors use such labels as: “community investing,” “ethical investing,” “green investing,” “impact investing,” “mission-related investing,” “responsible investing,” “socially responsible investing,” “sustainable investing” and “values-based investing,” among others.
What strategies do sustainable and responsible investors use?Traditionally, responsible investors have focused on one or both of two strategies. The first isESG incorporation, the consideration of environmental, community, other societal and corporate governance (ESG) criteria in investment analysis and portfolio construction across a range of asset classes. An important segment, community investing, seeks explicitly to finance projects or institutions that will serve poor and underserved communities in the United States and overseas. The second strategy, for those with shares in publicly traded companies, is filing shareholder resolutions and practicing other forms of shareholder engagement. Sustainable investing strategies work together to encourage responsible business practices and to allocate capital for social and environmental benefit across the economy.
How large is the sustainable and responsible investing marketplace?
The US SIF Foundation's Report on Sustainable and Responsible Investing Trends in the United States identified $6.57 trillion in total assets under management at the end of 2013 using one or more sustainable, responsible and impact investing strategies.
Sustainable and Responsible Investing
in the United States in 2014: $6.57 trillion
From 2012 to 2014, sustainable, responsible and impact investing enjoyed a growth rate of more than 76 percent, increasing from $3.74 trillion in 2012. More than one out of every six dollars under professional management in the United States today—18% of the $36.8 trillion in total assets under management tracked by Cerulli Associates—is involved in SRI.
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Who are sustainable, responsible and impact investors?
SRI investors comprise individuals, including average retail investors to very high net worth individuals and family offices, as well as institutions, such as universities, foundations, pension funds, nonprofit organizations and religious institutions. There are hundreds of investment management firms that offer SRI investing funds and vehicles for these investors.
Practitioners of sustainable, responsible and impact investing can be found throughout the United States. Examples include:
Individuals who invest—as part of their savings or retirement plans—in mutual funds that specialize in seeking companies with good labor and environmental practices.
Credit unions and community development banks that have a specific mission of serving low- and middle-income communities.
Hospitals and medical schools that refuse to invest in tobacco companies.
Foundations that support community development loan funds and other high social impact investments in line with their missions.
Religious institutions that file shareholder resolutions to urge companies in their portfolios to meet strong ethical and governance standards.
Venture capitalists that identify and develop companies that produce environmental services, create jobs in low-income communities or provide other societal benefits.
Responsible property funds that help develop or retrofit residential and commercial buildings to high energy efficiency standards.
Public pension plan officials who have encouraged companies in which they invest to reduce their greenhouse gas emissions and to factor climate change into their strategic planning.
What are the fastest growing areas of sustainable and responsible investing?
Mutual funds are one of the most dynamic segments within the ESG investing space. The number of ESG mutual funds in the United States grew from 333 to 456, and their collective assets increased from $641 billion to $1.93 trillion, an over 200 percent increase.
Alternative investments also had strong growth over the last two years. Alternative investment funds include social venture capital, double or triple bottom line private equity, hedge funds and property funds. The US SIF Foundation identified an estimated $224 billion in capital under the management of 336 alternative investment funds at the start of 2014, up dramatically from the $37.8 billion it identified in 177 funds in 2010. Alternative investment ESG assets increased by 70 percent over the past two years.
Like the rest of the sustainable and impact investing industry, community investing has experienced dramatic growth over the last decade, though the rate of increase has slowed since 2012 with the field's increasing maturation. From 2010 through 2012, sector assets increased 47 percent during a period when a "Move Your Money" campaign encouraged numerous investors to shift their depositary accounts from "too big to fail" banks to smaller, local, community-based financial institutions. From 2012 through 2014, sector assets increased approximately 5 percent to a total of $64.3 billion.
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How do SRI funds perform?
Sustainable and responsible investing spans a wide and growing range of products and asset classes, embracing not only public equity investments (stocks), but also cash, fixed income and alternative investments, such as private equity, venture capital and real estate. SRI investors, like conventional investors, seek a competitive financial return on their investments.
Several research studies have demonstrated that companies with strong corporate social responsibility policies and practices are sound investments. Studies with such findings have come from Oxford University, Deutsche Asset & Wealth Management, Morgan Stanley Institute for Sustainable Investing, TIAA - CREF Asset Management and the United Nations Environment Programme Finance Initiative, among others. For example, in 2015 Deutsche Asset & Wealth Management and Hamburg University conducted a meta-analysis of over 2,000 empirical studies, making it the most comprehensive review of academic research on this topic. They found that the majority of studies show a positive correlation between ESG standards and corporate financial performance.
- from the Forum for Sustainable and Responsible Investing
Mission statement for The Forum for Sustainable and Responsible Investment (US SIF):
"Rapidly shifting investment practices towards sustainability, focusing on long-term investment and the generation of positive social and environmental impacts."
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