ASTUTE, LONG-TERM INVESTORS understand that markets
include more than financial statements when valuing an investment. Intangibles
such as management quality, patents, brand recognition, market size, and
market penetration are important factors that many investors consider
when making investment decisions. By quantifying and evaluating these
intangibles, investors have a better understanding of the risks and opportunities
associated with potential investments.
Sustainable and responsible investing begins with
corporate governance and integrates environmental, social, and economic
factors in the investment process. This approach provides investors with
additional tools in comprehensive evaluation and management of intangibles.
Good corporate governance practices are based on disclosure, board independence,
and management accountability to shareowners. With this foundation, sustainable
and responsible investment strategies consider three more intangibles:
the environmental, social, and economic performance of companies.
Sustainable and responsible investing is a market
driven methodology that offers competitive financial returns while simultaneously
delivering social and environmental benefits. Institutional investors,
large and small, recognize this fact and have committed hundreds of billions
of investment dollars to these strategies over the past 20 years. Many
pension funds, universities, religious organizations, foundations, and
other institutions employ sustainable and responsible investment strategies
in order to:
- Provide competitive returns. Investments made using sustainable and
responsible investing strategies have been shown to provide competitive
financial returns when compared to traditional investment strategies.
- Fulfill fiduciary responsibility. All interpretations and opinions from
the Securities and Exchange Commission (SEC) and the Department of Labor
allow the use of sustainable and responsible investment strategies by
fiduciaries as long as the financial returns are competitive.
- Assess investment risk. A careful investment selection process combined
with active and engaged share ownership can help identify
risk and protect investment value.
Achieving Competitive Performance
In recent years, a growing number of trustees have embraced sustainable
and responsible investment strategies because they have demonstrated
competitive financial returns. As discussed in Chapter 3, more
than 20 years of data from mutual funds, indexes, pooled investments,
and individual institutions indicates that competitive financial performance
can be achieved when considering social, environmental,
and economic factors. Evidence suggests the following aspects are
important to success:
- Well-defined investment goals and processes that lead to the selection
of outstanding money managers and a review of methodologies, and
- Use of risk management strategies to reduce volatility of financial
Successful sustainable and responsible investment
strategies generally require the same portfolio management skills as other
investment approaches. Clear investment objectives, outstanding money
managers, and periodic evaluations are the most important determinants
of financial returns. Investment consultants can help initiate and establish
processes for determining goals and selecting money managers.
Chapter 3 illustrates that placing restrictions on
investments does not handicap the performance of money managers. The hundreds
of billions of dollars invested using sustainable and responsible investment
strategies shatters the canard that the best money managers will refuse
to work with restrictions. Money managers are unlikely to turn down business
and in the past have worked with clients to ensure that particular needs,
such as those related to sustainable and responsible investing, are met.
Other than U.S. Treasury notes, all investments carry some level of risk.
Institutions understand the need to have a policy for managing risk to
appropriate levels. The same is true for sustainable and responsible investment
strategies. The multi-factor models used to manage traditional portfolios
can be used to manage risk in sustainable and responsible investing portfolios.
One of the most overlooked aspects of sustainable and responsible investing
is placing money in underserved markets, which promotes the growth of
sustainable communities. Money invested in these communities is used for
such purposes as providing capital to small businesses and building affordable
housing. Community development institutions effectively serve this market
and provide a number of investment options, including FDIC-insured bank
accounts and CDs.
Meeting Fiduciary Responsibility
Despite indications that the long-term interests of corporations, shareowners,
and society are aligned, trustees may not understand that they are able
to consider social, environmental, and economic factors in investment
decisions. This hesitancy may be due in part to two factors that are thoroughly
examined in this guide:
Strategies such as proxy voting, filing shareowner resolutions, and
dialogue with management are meant to align corporate policies with
the interests of the owners of the company. The use of the term "shareowner"
rather than “shareholder” reflects a growing movement of institutional
investors interested in their ownership
rights. Proxy voting, shareowner resolution
filing, and dialogue with management
are deeply related to corporate governance
and can be effective in changing the behavior
of a company. It is important to remember
that because these strategies do not restrict
investment choices, they do not impact fiduciary responsibility.
- There are effective sustainable and responsible investment strategies
that do not affect the selection of investments and therefore do not
affect fiduciary responsibility issues, and
- All institutions may consider a broad interpretation of benefits as
long as the financial returns of an investment are competitive.
Every type of institution can use sustainable and responsible investment
strategies as long as competitive financial returns are anticipated. Even
pension funds, regulated by the strictest rules established by the Department
of Labor, may consider nonfinancial benefits when selecting investments.
For example, trustees of union pension funds can specifically choose investments
that may help the continued employment of fund participants as long as competitive
financial returns are anticipated. This is clearly a benefit in the interest
Other types of institutions can also specifically consider a broad definition
of benefits when considering investments. For universities, nonprofits,
and religious organizations, the definition of benefits includes considering
ethics and the mission of the organization. Nearly 30 years ago a book entitled
The Ethical Investor stimulated some university trustees to recognize
that ethical considerations related to endowment investments were indeed
part of their fiduciary responsibility.
Identifying Risk and Protecting Value
Institutional investors have immense responsibilities in maintaining a
careful and defined process when selecting investments. The trustees
and financial managers of institutions are stewards obligated by law to
manage their portfolio investments in the sole interest of their participants
and beneficiaries. Sustainable and responsible investing strategies
help identify risk and protect share value. They do that through the following
- Comprehensively evaluating intangibles in the investment process
by including the analysis of social, environmental, and economic
- Protecting long-term value components, such as brand value, through
engagement in fundamental corporate decisions
The consideration of economic, social, and environmental
factors in the investment process allows investment managers to evaluate
and influence the value of intangible assets. By specifically assessing
a company’s record on such issues as diversity, environmental performance,
and overseas labor, investors can identify potential problems. Resultant
risks might include lawsuits, government fines, community ill will, and
customer boycotts. The unexpected or repeated appearance of such problems
at a company can decrease brand value, goodwill, and ultimately the price
of the stock.
At the same time, analyzing social, environmental, and economic factors
helps identify leading companies that are likely to have higher levels
of employee retention and that are likely to foresee the changing demands
of society and the market. As explained in Chapter 3, social, environmental,
and economic performance has been shown to be a predictor of good management
because of the inherent complex and interdisciplinary talents required
to tackle the issues. Thus, by assessing social, environmental, and economic
factors in the investing process, institutions can choose industry leaders
that are most likely to be successful in handling unforeseen problems.
Sustainable and responsible investment strategies can also aid investors
in protecting the value of equities already in their portfolio. As long-term
relationships are forged with companies through passive investing techniques,
such as index purchasing, it becomes increasingly important for investors
to become vigilant in overseeing share value. This is especially true
of very large investors, as they may not be able to sell a position in
a company’s stock without causing an extreme disruption in the share price.
Proxy voting, shareowner resolution filing, and dialogue with management
are valuable tools for helping investors maintain and even increase the
value of a company’s stock.
A large number of institutions consider social, environmental, and economic
factors in their investment process, and have incorporated sustainable
and responsible investment strategies into their investment policy statements.
A sample of such institutions in Appendix 6 gives a sense of their diversity.
Pension funds, foundations, religious organizations, universities, unions,
and nonprofit organizations are all well represented.
However, these organizations may not fully agree on a name for investing
strategies. Sustainable and responsible investing is but one phrase that
describes the process of considering intangible performance factors in
Over the past thirty years, as the development of sustainable and responsible
investing has advanced, there have been numerous terms used to describe
the process of including intangible performance criteria in the investing
process. Probably the best known and widely utilized is "socially responsible
investing." Another related term popular in the U.S. is "corporate social
responsibility" which specifically looks at business practices of companies.
In Canada and Australia the term "ethical investing"
is typically used when describing the inclusion of social and environmental
factors in the investing process. The terms "double-bottom line" and "triplebottom
line" are gaining prominence in Europe – implying that businesses and
investors need to measure social and environmental results in addition
to financial results. More recently, the best-in-class strategies of "sustainability
investing" and "eco-efficiency investing" have been added to the glossary
of terms used in Europe and by some investors in the United States.
"Sustainable and responsible investment strategies" is the primary term
used in this guide because it connotes the inclusion of environmental,
social, and economic criteria in the investing process. It also specifically
includes community investing strategies that might not be present in other
terms. Sustainable and responsible investing does not specifically require
institutions to evaluate investments from a moral or ethical perspective,
although many may choose to do so. This guide also uses the term "social
and environmental screening" as one strategy for defining an investment
Sustainable and responsible investing helps investors support and profit
from business practices that leading companies are using to sustain themselves
into the future. This process benefits investors and society.
1 Graham, Benjamin and David Dodd. Security Analysis. New
York: McGraw-Hill. 1934, p. 508. (Referenced from CalPERS Investment Policy
2 Simon, John G., Charles W. Powers, and Jon P. Gunnermann. The Ethical
Investor. Yale University Press. 1972.
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