August 24, 2017 CHTCS

What is Ethical Investing?

WHAT IS ETHICAL INVESTING?

The Biblical-era concept of “Ethical Investing” has been edging into mainstream conversation under the auspice of Twitter and the hashtag #GrabYourWallet. The consumerism movement is broadly affecting companies through boycotting efforts like #GrabYourWallet and investment strategies that impact company leadership, company image, and overall revenue. Historically, investing ethically had been guided by religious guidance from Jewish law to the Qur’an focused on social justice concepts that advise investors to avoid interest in businesses such as liquor, pornography, gambling, and banks. Under the New Testament teachings of the Methodists and Quakers, an expansion of social justice embraced peace and nonviolence by avoiding profit from products designed to enslave or harm fellow human beings, including war.

The contemporary concept of Ethical Investing is synonymous with various investment terms; Sustainable-Responsible-Impact (SRI) investing, Socially Responsible Investing, and Impact Investing. In the last 60 years, ethical investing has interwoven itself into government policies, improved human rights, and environmentalism as shown in the Vietnam War, Civil Rights Acts, the advent of Earth Day, increased investment funds, the Domini Social Index, and the formation of National Action Plans (NAP).

Today, investors are driven by profit potential integrated with an evaluation of environment, social, and governance (ESG) factors through qualitative and quantitative analysis that aligns with their personal values and social priorities. As a result, a responsible and sustainable approach to ethical investing has culminated into three separate investment strategies.

ETHICAL INVESTMENT GROWTH FACTORS

Since 2006, steady growth of increasing ethical investment participation has been encouraged by the adoption of the UN’s Principles for Responsible Investment (PRI), six principles formed by investors, for investors, to inspire development of a more sustainable global financial system that encourages environmental, social, and governance (ESG) factors. Aside from the nearly 1,700 worldwide PRI signatories that represent $62 trillion, ethical investment growth is powered by several other modern-day influencers;

INFORMATION: Investors are better educated by higher quality information and research.

CLIMATE CHANGE: Increased consumer and investor awareness of the climate crisis has contributed to the avoidance of businesses contributing to the problem and investing in solutions.

PERFORMANCE: Enduring evidence of increased investment performance has dismissed fears of poor returns.

AVAILABILITYHundreds of responsible investments options are offered through funds and investment managers.

VALUES AND AUTHENTICITY: Investors recognize their money has an impact through consumer purchases and investment decisions affording investors the opportunity to invest in alignment with their personal, moral and ethical values.

CORPORATE SCANDALSTrust in leadership from recent scandals and fraud has spurred investors to conduct more research into corporate behavior and impact.

WOMEN: An increased number of woman investors are aligning their money with social impact.

MILLENNIALS: The 85 million strong millennial generation born between the early 1980’s and early 2000’s is the largest generation in American history, and they areseeking to make a difference in society through their purchases and investment strategies.

Photo courtesy of UN Principles for Responsible Investment (UNPRI)

ETHICAL INVESTMENT INVESTMENT INVESTOR

An assortment of SRI investing opportunities are available to ethical investors. The most common areas of investment are assets held through money managers and community investments. According to a new study released by the Global Impact Invest Network (GIIN), 95% of impact investors reported financial return at or exceeding expectations with 98% meeting or exceeding impact expectations demonstrating duo-fold benefits to ethical investing. With an increased allure, ethical investors are comprised of various backgrounds and interests:

  • Individuals who invest in mutual funds with specialties for 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 social 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.

ETHICAL INVESTMENT STRATEGIES

ESG INTEGRATION

Consisting of 93% of the SRI investment trend, the Environmental, Social and Governance (ESG) incorporation investment strategy focuses on a company’s management of ESG factors. The combination of these factors and qualitative insights into a company’s corporate policies, practices, culture, and impacts on ESG factors have a material influence on a publicly traded company’s profitability, value and share price. Asset managers and asset owners combine ESG issues into the investment process through a variety of ways:

  • Positive/best-in-class are selected for positive ESGperformance relative to industry peers.
  • Negative/exclusionary screening removes companies or sectors deemed unacceptable or
  • controversial from a fund.
  • ESG integration is a systematic or explicit inclusion of investment managers of ESG factors into traditional financial analysis.
  • Impact investing is targeted investments, typically made in private markets, aimed at solving social or environmental problems.
  • Sustainability themed investing selects assets specifically related to sustainability in a single-themed or multi-themed fund.

COMMUNITY IMPACT INVESTING

The goal of alleviating poverty, creating jobs, and providing affordable housing or financing small business development to disadvantaged communities is implemented through Community Impact Investing. The direct capital to people in low-income, at-risk communities is offered through community development financial institutions (CDFIs) that put community first, not the shareholder. CDFIs consist of four different business models and legal structures:

  • Community Development Banks provide capital to rebuild economically distressed communities through targeted lending and investing.
  • Community Development Credit Unions (CDCUs) promote ownership of assets and savings and provide affordable credit and retail financial services to low-income people.
  • Community Development Loan Funds (CDLFs) provide financing and development services to businesses, organizations and individuals in low-income communities through micro enterprise, small business, housing, and community service organizations.
  • Community Development Venture Capital (CDVC) funds are either for-profit or nonprofit entities that provide equity and debt-with-equity-features for small and medium-sized businesses in distressed communities.

SHAREOWNER ENGAGEMENT

In publicly held companies, Shareowner Engagement offers more direct control over responsible corporate citizenship. Shareowner Engagement employs shareholder resolutions or proposals that pertain to company policies and procedures, corporate governance or issues of social or environmental concern. The large societal impact of corporate citizenship improves the financial performance over time by affecting the well-being of all stakeholders: customers, employees, vendors, shareowners, communities, and the natural environment. Shareowner Engagement comprises of about 30% of SRI investments.