What is impact or socially responsible investing?

Impact Investing

Impact or Social Investing "Impact investing" (also described as social, environmental, social and governance (ESG) investing, or corporate social responsibility (CSR) investing) describes a style of investing combining a desire to maximize financial return with an attempt to maximize social good. Many believe social investing began with the Religious Society of Friends, better known as the Quakers. In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the business of buying or selling humans. Religious institutions have been at the forefront of social investing ever since.

In general, impact investors favor:

  • Environmentally responsible corporate practices .
  • Corporate practices that support workforce diversity.
  • Corporate practices that increase product safety and quality.

According to the Social Investment Forum (SIF), a nonprofit professional association dedicated to promoting impact, or socially responsible investing,

"Socially responsible investing (SRI) in the United States remained robust during 2001 and 2002, even as the rest of the investment world was stagnant. Assets in socially screened portfolios climbed to $2.15 trillion in 2003, an increase over the $2.01 trillion counted in 2001. Screened portfolios grew 7 percent from 2001, while the broader universe of all professionally managed portfolios fell 4 percent during the same period, according to the Social Investment Forum’s 2003 Report on Socially Responsible Investing Trends in the United States.

Screened portfolios, with $2.15 trillion in assets, represent the largest amount of assets in SRI. Community investing and shareholder advocacy contribute additional assets, resulting in a total of $2.18 trillion in professionally managed assets for all SRI.

  • Mutual funds. Socially responsible mutual funds counted by the 2003 Trends Report increased in number to 200 in 2003, up from 181 in 2001, 168 in 1999, and 139 in 1997. Assets in socially screened mutual funds identified by the Trends Report grew by 19 percent, to $162 billion, up from $136 billion in 2001. More than half (51 percent) of this growth is attributed to both newly identified and newly created funds, and 49 percent represents growth in existing assets. In terms of attracting investor assets, socially screened mutual funds grew on a net basis in 2002 while the rest of the mutual fund industry contracted. According to Lipper, socially responsible mutual funds saw net inflows of $1.5 billion during 2002. Over the same time, U.S. diversified equity funds posted outflows of nearly $10.5 billion.

  • Separately managed accounts. Of the $2.15 trillion in socially screened portfolios, $1.99 trillion are found in separate accounts (portfolios privately managed for individuals and institutions) with the remaining $162 billion residing in mutual funds. Assets in socially screened separate accounts grew by seven percent since the “2001 Report.” Screened private portfolios climbed to $1.99 trillion in 2003, as compared with $1.87 trillion in 2001, $1.34 trillion in 1999, and just $433 billion in 1997.

  • Shareholder advocacy. Between 2001 and 2003, shareholder advocacy activity increased by 15 percent, growing from 269 social and crossover resolutions (which combined aspects of both “social” and traditional corporate governance issues) filed in 2001 to 310 in 2003. Likewise the average percentage of votes received on these resolutions increased from 8.7 percent in 2001 to 11.4 percent in 2003. Of the total $2.15 trillion in all socially screened portfolios, $441 billion are in portfolios controlled by investors who are also involved in shareholder advocacy on various social issues. See our letter to the US Senate on divestment from the Sudan, for example. On February 1, 2000, Mr. Cunningham wrote to the office of U.S. Senator Samuel Brownback (R-KS) urging him to encourage pension funds to divest from the Sudan.

  • Community investing. Community investing climbed 84 percent between 2001 and 2003. Assets held and invested locally by community development financial institutions (CDFIs) based in the United States totaled $14 billion in 2003, up from $7.6 billion in 2001."

Impact Investing Strategies

Social investors use four basic strategies to maximize financial return and attempt to maximize social good. These strategies are outlined below.

SCREENING excludes certain securities from investment consideration based on social and/or environmental criteria. For example, many socially responsible investors screen out tobacco company investments. This is an example of a social screen at work.

DIVESTING is the act of removing stocks from a portfolio based on mainly ethical, non- financial reasons. An investor divests upon realizing that, at some point, “the cup of endurance runs over, and (is)..no longer willing to be plunged into an abyss of despair” over certain business activities of a corporation. Recently, CalSTRS (California State Teachers' Retirement System) announced the removal of more than $237 million in tobacco holdings from its investment, portfolio after 6 months of financial analysis and deliberations.

SHAREHOLDER ACTIVISM. Shareholder Activism efforts attempt to positively influence corporate behavior. These efforts include initiating conversations with corporate management, or dialoging, on issues of concern, and submitting and voting proxy resolutions. These activities are undertaken with the belief that social investors, working cooperatively, can steer management on a course that will improve financial performance over time and enhance the well being of the stockholders, customers, employees, vendors, and communities.

POSITIVE INVESTING involves making investments in activities and companies believed to have a high and positive social impact. Positive investing activities tend to target underserved communities. These efforts support activities designed to provide mortgage and small business credit to minority and low-income communities.

More Topics in Impact Investing/ESG/CSR/SRI

Corporate Ethics (or the lack therof..)

Corporate Malfeasense

Top 40 Books on Socially Responsible Investing

Other Social Investing Links

William Michael Cunningham

Eduction

  • B.A. (Economics) , MBA (Finance), A.M. (Industrial Organization)

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