Sustainable investing as sustainable strategyBy: Thomas Vles | Op: 21-5-2012
Socially responsible investing (SRI) is any investment strategy which values both financial return and environmental, social and governance (ESG) aspects. SRI has become a widespread investment strategy as the world values the general social good, but the return may be an even more important factor. Since the beginning of the nineties a growing number of academic studies have demonstrated the competitive performance to non-SRI funds over time. In the United States, SRI indexes like the FTSE KLD 400 have shown higher returns than prominent indexes, for example the S&P 500. The attractiveness is recognized by investors as the total value of the SRI market has more than quadrupled over the last 20 years. The question however, is sustainable investing a sustainable strategy?
A sustainable investment strategy has more to offer to investment funds than merely the social and environmental benefits. In a changing economical world it is important to ensure long term stability, sustainable investing can be a method to anticipate on large global developments thereby decreasing uncertainties. It is surprising that these benefits of sustainable investments are not being quantified in the overall value of an investment.
There are several ways to implement a sustainable SRI strategy on investment level using simple or more elaborate techniques. Most common (almost obvious) is ‘negative screening’ which is widely used by investors ranging from private equity firms to large institutional investors. In this simple strategy investors avoid investing in businesses in particular sectors (i.e. tobacco, weapons, gambling). A similar, more proactive approach is ‘positive selection’ in which the company selects investments based, in example, on their performance on ESG aspects. Other techniques include ‘Shareholder advocacy’ and ‘Community investing’. More elaborate approaches exist in which investors actively participate in their investments. This can be done by enabling flexible capital lines, inserting specific knowledge or mentoring projects. Well known examples are ‘microfinance‘, ‘mesofinance’ and ‘clean technology investments’.
One important question remains, how can sustainability factors or improvements be valued and how can they be quantified and implemented in investment strategies? Following this blog, the question will be discussed from different investor perspectives, starting with the perspectives of Private Equity and Private Banking.