by Shantanu Chandra, MBA ’13
Robert H. Smith School of Business
The past few years have been nothing short of tumultuous in the Global Financial Investment Industry. For myself, I feel that the recession has created a global perception that investment banking is lacking in nobility or goodness. With the “Occupy Wall Street “protests heating up, there certainly are some uncomfortable questions being raised on the feasibility and motives of the entire investment banking business model. The Wall Street Journal headlines compelled me to think of a solution to fix this problem of perception. During my research, I came across a firm – Calvert Investments.
Calvert is one of the largest investment funds dedicated to sustainable development in the United States. Since 1976, the company has focused on funding projects with return as well as with social value. Socially Responsible Investing recognizes the importance of corporate responsibility and societal concerns while making investment decisions.
The SRI ideology consists of maintaining the financial objectives of the investor while having a positive impact on society. The former is critical for the sustainability of SRIs and differentiates a socially responsible investment from charity.
Where did all of this responsible investing rhetoric come from? One can find snippets of the tenets underlying SRI in as disparate places as the Methodist church to the market response to apartheid in South Africa. John Wesley, for example, preached responsible investing and “not to harm your neighbor through your business practices and avoid industries like tanning and chemical production which can harm the health of the workers.” Historically, you can find other examples in the 20th century such as the Vietnam-era boycott of Dow Chemical products as they produced napalm for the war as well as mass investor pullout in 1980s South Africa.
With time the methodologies changed and in the contemporary era socially responsible investing focuses on promoting environmentally sustainable development and social development activities, including those undertaken in the emerging economies. More recently SRIs have also been working to protect the rights of indigenous people (check out this deck from Boston Common Asset Management, LLC outlining the interaction between their investment strategy and native workers in Peru and Ecuador.)
Going through more of the information available, it seems that SRI’s adopt four general strategies in capital markets:
- Screening: The practice of evaluating investments based on the social, environmental and corporate governance criterion. This encompasses both negative and positive screening. Generally investors seek to invest in companies that are doing social good and earning good returns as well. Conversely, those industries which harm the environment, society or individuals are excluded from consideration.
- Divesting: The practice of removing companies from the investment portfolio which indulge in activities that could harm the environment or society.
- Shareholder Activism: Social investors should work cooperatively to force the management to adopt a path to successful financial performance that simultaneously improves the well-being of stockholders, customers, vendors, employees and communities.
- Best in Class Selection: Investors should include companies with the best relative practices while maintaining a diversified portfolio (may be difficult under certain levels of negative screening)
It seems elusive though that the investors can achieve benefits out of socially responsible investing but data provided by United States Social Investing Forum (USSIF) proves otherwise. Some key facts are as follows:
- In 2010 SRIs included $3.07 trillion out of $25.2 trillion in US marketplace investment
- In 2010 there were 250 socially screened funds with assets of $316.1 billion
- The assets growth rate of SRIs from 2007 to 2010 has been 13%
- One out of every eight dollars under professional management in the United States today (12.2% of the $25.2 trillion in total assets under management tracked by Thomson Reuters Nelson) is involved in socially responsible investing
- Community investing is the fastest growing area of SRI. Over the past three years it has grown from $25 billion to $41.7 billion in assets.
It is my hope that dissemination of information about SRI’s might change public perception of the investment banking industry. The era of impact investing has arrived, and the i-banking sector have and will continue to be major actors. With all of the attention that the Occupy movement places on Wall Street greed and corruption, it is comforting to think of a positive path forward for this critical and influential industry.
Shantanu Chandra is a CSVC blogger and a first-year MBA candidate at the Robert H. Smith School of Business of the University of Maryland at College Park.