The future of Socially Responsible Investment
Sociallly responsible investment, a type of investment that tackles with sustainability issues, is growing. Will it be mainstream and have a direct impact on finance?
Coro Strandberg, May 2005
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With socially responsible investment (SRI) assets at an estimated $3 trillion globally and climbing it is timely to assess the future of the SRI industry. What will the future of socially responsible investing hold for investors, managers, advocates and the sector overall? Is it poised for growth, or will it retain its niche market status? Who is the future SRI consumer? What trends in screening, shareholder engagement and community
investment can be expected? What of the future SRI product array and what will be the impact and the critique of the SRI industry in the coming decade? What competitive trends will prevail? These and other questions are addressed in this study on “The Future of Socially Responsible Investment” commissioned by Vancity Credit Union, a leader in the SRI industry in Canada, founder of the first Canadian ethical mutual fund, Ethical Growth Fund, in 19861 and owner of Real Assets, the first Canadian investment
management firm totally dedicated to SRI,.
In the spring of 2005 Vancity commissioned Strandberg Consulting to conduct a study on the future of SRI to assess the trends and drivers of socially responsible investing over the coming decade. 42 thought leaders were interviewed for their views on these trends, representing the diversity of the sector, including asset managers, trade associations,service providers, NGOs, labour and faith groups, academics and think tanks. The study adopted the three-pronged North American definition of SRI, including screening on
social and environmental issues, shareholder advocacy/engagement to improve corporate responsibility, and community investment to advance local development.The thought leaders were a fairly homogenous group in their views on the future of SRI, with most predicting a positive future, at least in terms of growth and awareness. For the most part they believe SRI will experience significant growth over the decade to the point where it becomes virtually mainstream: mainstream asset managers will regularly incorporate non-financial considerations into stock analysis and will increasingly assess
stocks from a long term perspective taking sustainability considerations into account. It is expected SRI will increasingly come to be known as “responsible investing”, though there will be a strong and growing values-based, high impact, social action SRI niche with diverse products and services to assist values-based retail and institutional investors
who wish to align their personal values with their investment needs. While screening is expected to become increasingly integrated into mainstream analysis, it is also expected to remain an important investment style for these values-driven investors. Shareholder action is anticipated to overtake screening as the more leveraged social change model.
One of the most common trends identified by the interviewees was this predicted increase in shareholder engagement, which is expected to become more routine for SRI and traditional fund managers including pension funds, religious groups, mutual funds and foundations who will demonstrate an increasing willingness to engage with management on a host of issues. SRI funds will join with other asset managers and stakeholders to advance common shareholder issues, while corporate engagement in collaboration with
non-shareholder constituencies will grow in strength and impact.
The community investment (CI) sector is expected to grow exponentially in the US, though less so in other regions, to the point where CI may become a mainstream investment choice. Similarly the SRI client base is expected to expand over the decade driven both by institutional investors, niche retail markets, and the witnessing of economic shocks brought on by the realities of flawed global economic theories.
According to many thought leaders, the potential exists for “everyone” to become a consumer of SRI products in future both as a result of the mainstreaming trend and due to growing awareness of sustainability issues.
As for the SRI product array, every conventional product will be matched by an SRI alternative in future, according to the majority of thought leaders: every imaginable investment will have an SRI equivalent.
Thought leaders also predict the SRI industry will meet success in advancing its sustainability aims, though the predicted range is from modest to huge impact. The biggest gains are expected in SRI’s efforts to drive increased transparency and disclosure amongst corporations. Climate change is another area where thought leaders expect progress, along with improved internal corporate practices, much of which will be achieved through multi-stakeholder collaboration.
While many interviewees could point to positive gains expected from SRI over the decade, a number of potential criticisms are also predicted including that SRI will not have any meaningful impact in affecting the trajectory of unsustainable corporate behaviour, remaining a marginal activity.considerations into their investment analysis may or may not be branding themselves as sustainability-minded and may or may not be providing a full suite of SRI niche products.
Niche SRI firms will be competing for market share, defining, marketing and branding their values proposition to differentiate themselves.
These and other trends identified by the international thought leaders will be affected by a number of industry and external drivers over the decade, including the growing awareness of the business case for sustainability investing, demographic changes in youth and aged markets, social, environmental and economic trends, growth in the ethical consumer market, government legislation, increasing discontent with the dominant
economic system, stakeholder pressure, increased disclosure and education and
The thought leaders by and large predict healthy growth for the SRI industry in the years ahead. Much of the growth will be captured by the mainstream investment industry, but considerable positive developments are predicted for niche, high impact, social action funds as well. Real progress can only be claimed, however, when material social and environmental gains are achieved. It is thus expected that a focus going forward will be on sustainability performance and the prospect for a high impact approach to sustainable investing which applies the tools and techniques of financial innovation and the capital allocation process to tackle sustainability problems. This is the future transformative potential of SRI.